AFRICAN CREDIT OUTLOOK: AN ECONOMIST’S PERSPECTIVE

GAIMIN NONYANE Head of Economic Research desk and Project Manager for Local Knowledge Africa (LKA; an advisory arm at Ecobank Research) at the pan-African bank, Ecobank Group, based in London. Gaimin joined the bank in November 2012, and helped to launch the bank’s first ever Country Profiles, designed to give investors an insight into the operating environment in Middle Africa. Prior to that, she headed the sub-Saharan Africa desk on macroeconomic and political research at Dun & Bradstreet (D&B) UK Ltd., while also covering some markets in East Asia. Gaimin has an MSc in International Economics and Policy and a BA (Hons) in Economic Studies with Law.

JOHN ASHBOURNE African Economist at the Capital Economics covering Sub-Saharan African markets. Prior to joining Capital Economics, John was a senior Africa Country Risk Analyst at Business Monitor
International, a division of Fitch Ratings. He holds a bachelors’ degree in International Relations from the University of Toronto and a master’s degree in Contemporary Chinese Studies from the London School of Economics.

CMinAfrica: What are the key external macro challenges that Africa faced in 2016 and how will it affect African sovereign issuers and borrowers in 2016 and beyond?

GAIMIN: Key external macroeconomic issues include tail risks from 2014-15, specifically, the commodity price slump, which has undermined FX liquidity in African markets, resulting in weaker exchange rates and elevated inflation, prompting central banks to sustain tight policies.

Uncertainty over the US Federal Reserve’s interest rate hike cycle has also contributed to imbalances in African markets – creating volatility in Africa’s FX markets. Indications that the US Fed might raise policy rate again (as was the cases In December 2015) will further undermine capital flows into the African region, and hence FX prospects.
These factors, among other structural problems, have led to a general upward shift in sovereign yield curves in a number of African economies, increasing government’s debt servicing costs while crowding out the private sector. Apart from tapping in domestic markets to finance short term needs, African governments have increasingly turned to the IMF for balance of payments support. Some have introduced FX restrictions, which have tightened the market.

JOHN: Most African economies faced a serious terms of trade shock in 2015 as the price of their exports (mostly commodities) fell sharply. This cut domestic incomes and caused growth to slow.
While some commodity prices have recovered a bit this year, the effects of this economic adjustment are still being felt. In some countries weaker currencies have pushed up inflation. In others, government efforts to hold currencies stable have created strains in the balance of payments. Almost everywhere governments face large fiscal deficits as they struggle to balance the need to expand services with the reality of constrained revenue. So even while the worst of the external shock is probably over, the long-term effects of the adjustment to lower commodity prices will continue to be felt. In Nigeria and Angola, where the authorities have prevented the economy from adjusting to the new reality, the worst is yet to come. For Africa as a whole, we expect that growth will be appreciably slower over the coming years, probably around 3-4%. As markets realise that Africa faces a sustained period of lower growth, we expect that investor appetite for African debt will cool. The “Africa Rising” narrative set off a boom in African sovereign debt issuances, but this will not be repeated. With the financing requirement remaining high in many African sovereigns in the months ahead given still weak commodity outlook, T-bill and short term bond issuance will continue presenting some opportunities for investors.

CMinAfrica: What must issuers and borrowers do to overcome these challenges?

GAIMIN: Issuers will now have to accelerate structural reforms to reduce their is also crucial. In addition, it is crucial that proceeds from bonds are invested in productive sectors so that they will be able to generate revenue and help reduce repayment risk for issuers. On the part of borrowers, there is a need to hedge against FX risk, although in African markets, these are usually short term in nature.

JOHN: Individual countries may well outperform – Kenya and Ethiopia, for instance – but we do not believe that the general trend towards structurally lower growth is escapable. States seeking to borrow will have to differentiate themselves from an increasingly tepid growth story rather than jumping on to the “Africa Rising” bandwagon. Sovereigns – and private firms – should highlight the importance of non-commodity growth sectors, like construction, agriculture, and consumer-facing retail.

This article features in INTO AFRICA August 2016 edition which focuses on the Bond Markets in Africa.