Africa Sovereign Monitor: stressed economies need policy adjustment, international support
“As multilateral lenders face growing demands from borrowers, the region needs to continue reforms and seek greater coordination between official and private creditors to tackle the continent’s long-term economic, financial, and sustainability challenges including climate change,” says Thomas Gillet, associate director at Scope Ratings and co-author of Scope’s Africa Sovereign Monitor assessing the credit outlook for the region.
“Long-term consequences of Russia’s war in Ukraine, high inflation, higher borrowing costs and bad weather threaten the region’s post-pandemic recovery and economic stability. These multiple shocks have resulted in acute tensions in energy and food supplies, exacerbating vulnerabilities,” says Gillet.
“Many countries are also benefitting from recovering demand for exports in advanced economies, where growth might pick up again later this year, and there are signs that recent capital outflows are reversing,” he says. According to the Africa Development Bank, Africa’s GDP growth will average 4.0% in 2023 and 2024, a mild rebound compared with growth of 3.8% last year, but down from 4.8% in 2021.
Public finance challenges mount for African countries (median figures, 2000-22)
Source: IMF, Scope Ratings
Tighter global monetary policy will still aggravate vulnerabilities as public debt rises. Many African countries took advantage of low interest rates over the past decade to tap private investors through international debt markets.
“Today, tighter financial conditions, amid historically high debt and more complex debt profiles, are credit negative for the region. More than 40% of countries of the region spend more than 10% of revenue on interest. Around one sixth spend more than 20%,” says Thibault Vasse, co-author and associate director at Scope.
Some African countries have become more resilient in recent years, but many cannot address financial challenges on their own. Fiscal buffers narrowed significantly with the implementation of countercyclical measures during the pandemic crisis.
Political risks are also mounting ahead of a busy year for elections, which are taking place in more than 20 African countries – including Gabon, Madagascar, Nigeria, and Zimbabwe. Rising food and energy prices and, in some cases, food shortages are feeding social discontent amid growing geopolitical tensions, not least the Russian- and Islamist-backed incursions in the Sahel, conflict between the Democratic Republic of the Congo and Rwanda, and civil wars in Ethiopia and Libya.
Requests for financial assistance are likely to grow such as via debt restructurings. The share of sub-Saharan African countries either in debt distress or at high risk of debt distress rose to 65% in September 2022 from 18% in 2014.
“More countries could seek debt relief should external assistance be insufficient to meet financing needs. The sovereign debt-restructuring architecture has been reinforced since the Covid-19 crisis, but lengthy and complex restructuring negotiations make creditor coordination difficult,” says Vasse. “Still, comprehensive debt restructuring for select countries will prove pivotal in supporting stronger credit ratings over the long term.”
Innovative arrangements such as guarantees, liquidity facilities, contingent instruments among others will help African governments tackle credit challenges.
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