AFRICA: Rising public debt level increasing risk of distress

LAGOS (Capital Markets in Africa) – Fitch Ratings indicated that the public debt level in Sub-Saharan African (SSA) countries has significantly increased, as the median debt level of the 19 Fitch-rated SSA sovereigns doubled from 27% of GDP at the end of 2012 to an estimated 56% of GDP at end-2018. It noted that SSA sovereigns have used some of the fiscal space that was afforded by the Highly Indebted Poor Countries initiative to boost investment, GDP growth and human development indicators. But it cautioned that rising public debt levels leave limited scope for SSA countries to continue to accumulate public debt at such a rapid pace, without increasing the risk of debt distress for many countries. It said that SSA sovereigns could continue running wide budget deficits and increase public debt levels, which raises the risk of rating downgrades and potential defaults; or accept a slowdown in the pace of real GDP growth and in the improvement of human development indicators. It added that SSA sovereigns could modify their growth models in order to be less dependent on non-concessional debt.  

Further, Fitch said that the rise in public debt levels has weighed on the agency’s ratings of SSA sovereigns, and pointed out that the average SSA sovereign rating has declined from ‘BB-’ at end-2012 to ‘B+’ at end-2018. It added that, for many SSA countries, further rises in public debt levels will increase the prospect of sovereign  rating  downgrades.  The  agency  expected  that  the budget deficits of the majority of SSA sovereigns will narrow in 2019 and 2020, which would be sufficient for only seven countries to reduce their public debt level. In parallel, Fitch considered that countries that implement structural reforms and policies to boost real GDP growth, exports and tax revenues, without incurring higher debt levels, increase the likelihood of positive rating actions on their sovereigns, or reduce the likelihood of negative

ones. It indicated that such initiatives include raising domestic tax revenues to fund investment spending, encouraging FDI, implementing growth-enhancing structural reforms, and raising governance standards.