Loan repayments could cripple African countries’ growth prospects in 2019

The economies of most African countries are facing uncertainties as household incomes continue to drop in some.

A new study by the global rating agency — Moody’s Investor Services — shows the overall sovereign creditworthiness in sub-Saharan Africa in 2019 is negative, largely due to the credit challenges posed by fiscal and external vulnerabilities.

This is also attributed to tightening global financing conditions and trade tensions between the US and China.

There are fears that the growing trade conflict between the two major economies will contribute to slower Chinese and global growth and push down commodity prices.

The Moody’s report, released last week paints a grim picture of African economies, noting that the continent’s growth has slowed down from the high levels of the past years.

"Our negative outlook for sovereigns in sub-Saharan Africa is driven by persistent credit challenges related to their ongoing fiscal and external vulnerabilities," said Daniela Re Fraschini, the agency’s assistant vice president and author of the report.

Income increase

The report notes that incomes in most African countries will increase marginally in 2019, denoting limited progress in improving living standards and reducing poverty.

“Social tensions arising from poverty and/or high inequality could intensify, forcing governments to put on hold fiscal consolidation plans and structural reforms such as energy subsidy reforms,” reads the report.

In South Africa, for instance, high levels of inequality have resulted in a review of property ownership and land reform and, but with no clarity on the outcome.

The report argues that while the continent’s economic growth is expected to recover gradually, with real GDP growth accelerating to 3.5 per cent in 2019 from an estimated 2.8 per cent in 2018, the tightening of global financing conditions and the trade tensions between the US and China could slow down that projected growth.

Economic outlook

The report cites six African economies with a negative economic outlook for 2019, largely due to their unpredictable policies, which have made the investment climate unfavourable for doing business.

Tanzania is the only East African economy on the list. The others are Democratic Republic of Congo, Namibia, Mozambique, Cameroon and eSwatini.

The outlook for other East African economies — Kenya, Uganda and Rwanda — has been classified as stable but not positive.

“Tanzania’s negative outlook reflects an increasingly unpredictable policy environment weighing on the business climate, which could have a negative long-term impact on the country's growth potential and ability to attract foreign investment,” reads the report.

According to Moody’s, Africa’s increased exposure to foreign debt has increased the cost of debt servicing by governments, implying that most of their tax revenues will be channelled towards repayment of debt rather than infrastructure development in 2019.

This, according to the report, would put undue pressure on local currencies, widening current account deficits and driving inflation upwards.

“A significant reliance on foreign currency commercial borrowing increases refinancing risk and exposes sovereign debt trajectories to potential depreciation pressures.

“A large share of foreign-currency debt increases vulnerability to currency pressures,” reads the report.

“The share of foreign-currency debt across the continent remains high, averaging around 57 per cent of total debt in 2018, and it expected to increase over the next two years.

According to the report, the interest rate on foreign-currency denominated commercial debt in Africa is higher than the interest rate on borrowing from official creditors, as reliance on concessional financing has declined in many countries over the past decade.

Last year, Moody’s downgraded the sovereign ratings for Kenya, Zambia, Angola and Gabon.