Sub-Saharan Africa (SSA) government debt burdens are rising at a faster pace and to a higher level than for other emerging markets (EM), heightening the risk of further downgrades and defaults, Fitch Ratings says. The agency forecasts the median government debt/GDP ratio for the 19 Fitch-rated SSA sovereigns to reach 71% at end-2020, from 57% at end-2019 and 26% in 2012.
The coronavirus and oil price shock is having a severe impact on SSA. Fitch forecasts median real GDP to fall by 2.1% in 2020 and the budget deficit to widen to 7.4% in 2020, from 4.9% in 2019. This combination, amplified by currency depreciation in many cases, will cause a 14pp jump in the median debt ratio this year.
The coronavirus shock compounds a marked secular deterioration in SSA public debt and interest burdens that has been running for a decade and that will be challenging to reverse. Mozambique and the Republic of Congo have defaulted since 2016, and Fitch believes further sovereign defaults are probable. Widening primary budget deficits have been the largest contributor to rising government debt/GDP. Debt will continue to rise without substantial fiscal consolidation.
Moreover, the GDP growth rate has declined since 2014, reflecting the drop in commodity prices and a lacklustre rate of return on investment. The average real interest rate on debt has also risen since 2017, partly reflecting a decline in the share of total external borrowing that is on concessional terms, as countries stepped up borrowing from the Eurobond market.
New IMF emergency support worth USD8 billion to 13 Fitch-rated SSA sovereigns and the G20 Debt Service Suspension Initiative (DSSI), which covers bilateral debt service in 2020 and is open to 15 of them (although not all will participate), provide useful fiscal and external financing. However, they are moderate in size at around 0.9% and 1.2% of GDP, respectively; and DSSI 'flow' relief and new IMF loans are not designed to address debt stocks and medium-term risks to debt sustainability.
Fitch has downgraded seven of the 19 rated SSA sovereigns since the beginning of March 2020, reflecting both the severity of the coronavirus shock and the limited margin of resilience after the rapid rise in debt and given other credit weaknesses. The average SSA rating has now declined by 1.5 notches since mid-2013 to 'B'.
Seven sovereigns in the region have Negative Outlooks. Rising debt burdens and the impact of the coronavirus and oil price shocks point to further downward pressure on SSA sovereign ratings.
The full report: Rising Debt Distress in Sub-Saharan Africa.
