Governments in Sub-Saharan Africa are facing increasingly expensive debt financing as favourable global and domestic conditions come to an end, Standard & Poor’s Ratings Services (S&P) said on Monday, adding that a third of the countries it rates in the region could see interest bills equal to 10 percent or more of government revenues over the next three years.
The report said sub-Saharan African (SSA) governments had enjoyed unusually favourable financing conditions over the past few years. Many had issued maiden bonds in the global capital market and yields hit all-time lows in mid-2014. S&P said this was mostly as a result of exceptionally loose monetary policies pursued by central banks in the developed world and advantageous commodity prices.
But the tide had now turned.
“We think these sovereigns will direct an increasing share of revenues over the next three years to servicing their debt. The effective management of these changes will pose difficult policy choices for African governments.”
The agency noted also that several SSA currencies had depreciated dramatically. Of the 18 countries S&P rate in the region, only four had experienced currency depreciation of less than 10 percent against the US dollar in 2015.
A depreciating currency increases the foreign currency debt burden (in local currency terms) relative to gross domestic product.
The statement noted that Mozambique, Zambia, Ghana, Angola and Senegal were most affected by such debt inflation.
S&P added that refinancing of US dollar-denominated commercial debt was also set to become more expensive as the Federal Reserve tightened monetary policy.
On the domestic front, the statement added, fiscal performance was expected to deteriorate in 12 of 18 rated SSA sovereigns over the next three years.
“We project that for over one-third of the regional sovereigns we rate, interest expenditures will reach or surpass 10 percent of government revenues over the next three years.”
The report says S&P’s sovereign ratings already largely incorporated these expected developments, but ratings could “come under strain” should global factors exert more pressure than expected on the SSA governments, or their fiscal positions deteriorate further or faster than predicted.
“Nevertheless, we currently view this scenario as unlikely for most SSA sovereigns. Of the 18 sovereigns we rate in the region, five have a negative outlook and the remainder carry a stable outlook.”