Jan Friederich, Head of Middle East and African Sovereign Ratings, explains the key drivers behind the decision to revise the outlook on South Africa to Negative and affirm the rating at ‘BB+’ in a conversation with Stephen Schwartz, Senior Director, Sovereign Ratings. They also discuss South Africa’s economic and political outlook from a credit perspective.
The business profile of AGA is in line with a low 'BBB' rating category, supported by its leading position as a gold producer and global geographic diversification. The operational profile also takes into consideration that the business derives near 80% of its gold output from more challenging operating environments, including Tanzania, Guinea, Ghana and Argentina.
The Outlook revision reflects a marked widening in the budget deficit as a result of lower GDP growth and increased spending, including state-owned enterprise (SOE) support, increasing our projections for government debt/GDP and heightening the difficulty of stabilising debt/GDP over the medium term.
Tony Stringer, Managing Director, Global Sovereigns and Ed Parker, Head of EMEA Sovereign Ratings discuss Sub-Saharan African (SSA) debt, noting government debt/GDP has risen steeply in SSA, with the median of 19 Fitch-rated sovereigns doubling since 2012 to 56% at end-2018. Fitch believes that SSA sovereigns have used some of the fiscal space afforded by the Highly Indebted Poor Countries initiative to boost investment, GDP growth and human development. Read Report
The downgrade of Zambia's IDRs reflects the government's high external financing requirements, combined with a continued fall in official foreign exchange reserves, constrained access to domestic and external financing, and a further rise in government debt in the context of an ambitious capital expenditure programme.
In our view, Angola is over-banked. The top seven banks control nearly 80% of sector deposits, so the rest of the sector (22 banks with about 20% of sector deposits) includes a large number of banks with minimal scale, given Angola's population of only 25 million and very low banking penetration.
The regional central bank, BEAC, has taken a critical role in efforts to adapt to lower oil prices. A 50bp increase in the policy rate last year has contributed to lower imports, as has BEAC's move to stop providing financing to CEMAC member governments.
Fitch Ratings' Jan Friederich and Mahmoud Harb write for beyondbrics about the shocks that have hit African countries in recent years that have led to a strong increase in the number of International Monetary Fund bailouts in the region.
Each of the entities' ratings are capped by the sovereign credit profile, given considerable exposure to sovereign credit risk through investments in sovereign debt and exposure to various state-owned enterprises. This has had a knock-on effect through a muted domestic operating environment.
The resignation of Jacob Zuma as president of South Africa reduces the risk of policy paralysis. Zuma's successor, Cyril Ramaphosa, will bring a greater focus to improving governance and strengthening economic and fiscal policy, which is likely to contribute to a recovery in business confidence and growth.
Kenya's fiscal deficit is likely to narrow following several years of expansionary policy. This shift towards fiscal consolidation will help to stabilise public debt/GDP levels and anchor Kenya's macroeconomic framework.
We consider capital positions as weak for most Moroccan banks. Banks calculate capital adequacy ratios according to Basel II, using the standardised approach. Regulatory minimum ratios are 9% for Tier 1 and 12% for total capital ratios, which appear high relative to some other markets.
Cote d'Ivoire's IDRs are supported by strong macroeconomic performance and low inflation, prudent macroeconomic policies, a structural trade surplus and moderate debt ratios. This is balanced against low governance and development indicators, two debt defaults since 1999, persistent risks to political stability and high dependence on agricultural commodities.
The downgrade reflects the weakening liquidity of Eskom and uncertainty about its ability to meet its financial obligations in the short term. The RWN reflects the potential for further downgrade in case of lack of government's tangible support or improved liquidity.
Several countries saw rising GDP growth in 3Q17, including Nigeria, Ghana, Tunisia, Senegal, Mongolia, Vietnam, Belarus, Paraguay, Bolivia and Jamaica, although economic activity slowed in Sri-Lanka, Ecuador, Georgia, Belize, Cote d'Ivoire and Kenya.
The widening of the Moroccan dirham's floating band is a step towards a more flexible exchange rate regime that will eventually bolster the shock-absorption capacity of the economy and help maintain its competitiveness.
The government has resisted calls by unions and some political parties to withdraw some of the main provisions of the 2018 budget law. It has only made minor concessions, such as a TDN70 million (USD28.7 million) increase in social spending. However, a renewed flare-up of social tensions remains possible and could raise risks to fiscal consolidation.
The insurance industry in Nigeria declined in real terms in 2016 as high inflation eroded modest nominal GWP growth. As GDP growth picks up and inflation slows, we expect to see a return to real GWP growth in 2018.
The government made significant progress with its reform programme in 2017 and remains on track with the USD12 billion three-year Extended Fund Facility signed with the IMF in November 2016. Fiscal consolidation is proceeding, although it will require a multi-year effort to reverse the increase in general government debt/GDP witnessed since the Arab Spring uprisings.
Debt/GDP has risen rapidly from a low of 57.2% of GDP in 2008 as the previous government implemented a large countercyclical public infrastructure investment programme to respond to the global financial crisis and take advantage of a narrowing window for concessionary financing.
Fiscal consolidation was temporarily interrupted in FY17. We forecast the general government deficit to narrow to 6% of GDP from 6.9% in FY16, against a revised government target of 5.3%. However, this improvement is due solely to a one-off surge in transfers from the South African Customs Union which we expect to lead to a downward adjustment in the receipts for FY19. Related: Fitch Downgrades 4 Namibian Issuers; Outlook Stable
At the regional level, we see little tangible evidence of advancement in financial sector reform. Implementation and target dates are slipping. A review of risk-weightings applied to CEMAC government exposures scheduled for September 2017 is delayed, and overhauling the deposit insurance fund by end-2017 looks ambitious, for example.
Cameroon's 'B' ratings balance a low GDP per capita of USD1,270 and weak governance indicators, against sustained economic growth and macroeconomic stability provided by membership of the Central African Economic and Monetary Community franc zone, which ensures currency convertibility and reduces foreign exchange liquidity risks.