Broadly stable outlook for Sub-Saharan African sovereign credit quality

London (Capital Markets in Africa):- The credit quality of sovereigns in Sub-Saharan Africa (SSA) over the next 12-18 months will be supported by strong infrastructure investment, structural reforms and competitiveness gains from currency depreciation, says Moody’s Investors Service in its latest sovereign outlook for the region.

However, lower oil and commodity prices, uneven global growth, latent political risk and tighter external financing conditions pose challenges of different magnitudes to the region’s economies.

The report, “Sovereign Outlook – Sub-Saharan Africa: Diverging Credit Trends Amid Uneven Global Headwinds”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“We expect Sub-Saharan Africa to remain the world’s second-fastest growing region this year,” said Kristin Lindow, the primary author of the report and a Senior Vice President in Moody’s Sovereign Risk Group. “Our broadly stable SSA sovereign rating outlooks balance negative factors, such as the impact of weaker commodity prices and tighter external financing conditions, against positive drivers, like growth-supportive infrastructure spending, ongoing reform efforts and a growing middle class supporting domestic demand.”

Moody’s has stable outlooks for 13 of the 17 SSA sovereigns it rates. The rating agency has positive outlooks for Côte d’Ivoire (B1 positive) and Senegal (B1 positive), exemplifying the potential for rating upgrades in the region over the next 12-18 months. At the same time, weaker commodity prices are slowing growth and exacerbating macro-financial imbalances, as is most acutely reflected in Moody’s negative outlooks on Angola (Ba2 negative) and Ghana (B3 negative).

Over the past decade, the region has recorded strong growth as a result of robust emerging market demand for SSA commodities, strong infrastructure spending and regulatory reforms with the aim of improving the business climate.

“These drivers — along with currency competitiveness gains from recent depreciation and the longer-term impetus from an emerging middle class — will continue to support sovereign credit quality,” said Matt Robinson, a co-author of the report and Manager of Moody’s Africa Sovereign Ratings Team.

Moody’s expects SSA growth to slow to around 4.5% to 4.75% this year, the second consecutive year of deceleration. Still, SSA will remain the world’s second-fastest growing region in 2015 after developing Asia, with growth remaining substantially above the global average of close to 3%.

SSA economies’ heavy dependence on commodities and natural resources, however, means that commodity price cycles strongly affect nearly every SSA country. In fact, oil exporters contributed around half of SSA’s total GDP in 2014.

The lack of economic diversity and limited revenue generation capacity are among the drivers of large fiscal deficits and fiscal vulnerability in the region. Fiscal deficits in the region are generally expected to increase this year, leading to higher public debt burdens. Tighter external financing conditions, however, will constrain alternatives to budget consolidation.

Meanwhile, events in Burundi this month and in Burkina Faso late last year highlight the latent political risks in some parts of SSA that constrain sovereign credit quality. The risk of social unrest remains due to a number of factors: longstanding presidential incumbents without political succession plans; an absence of strong political institutions; restive militaries; ethnic tensions; income inequality and a young and economically disenfranchised population are amongst a host of challenges confronting governments in the region.

Subscribers can access this report via this link: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1004806