Falling forex reserves and rising external debt burdens in particular weighed on sovereign risk across the continent, according to NKC African Economics.

Jacques Nel, Chief Economist: Southern & East Africa, NKC African Economics, said that the slump in commodity prices since 2014 has had a detrimental impact on sovereign credit risk across Africa, with many countries enduring rating downgrades in recent years. 

“However, some improvement in growth prospects, the adoption of policy reforms in some countries and structural adjustments in others suggest that a turning point has been reached, and we expect a stabilisation and in some cases improvement in sovereign risk in 2018,” he said.

Not only do low foreign exchange reserves reduce a country’s resilience against external shocks and its ability to honour external obligations, but they also lead to forex liquidity shortages in the domestic economy. 

And in turn, rising external debt raises sustainability concerns, with the latter exacerbated by increased currency risk.

“Stabilisation in forex reserves since 2016 has been supported by steadier foreign exchange holdings in larger economies such as South Africa and Libya and higher reserves in Egypt and Nigeria,” said Nel.

“Some countries that are less dependent on commodities have not been as negatively affected, and some have even seen an improvement in sovereign risk over this period. Most notably, these include Mauritius, Morocco and Senegal,” he added.

Nel said that more favourable growth prospects and policy reforms in some countries have resulted in most sovereign risk outlooks stabilising, and in some cases now even improving. 

Looking ahead, Nel noted that stronger growth in the continent’s largest economies (South Africa, Nigeria, Egypt) will have positive spillover effects into other countries in the region.

“While we expect a general stabilisation and in some cases improvement in both growth and sovereign risk across Africa in 2018, the recovery will not be uniform,” said Nel. 

“More diversified and less commodity-dependent economies such as those in East and some in West Africa will be the best performers with regard to both GDP growth and sovereign risk this year, while some of the larger and oil-dependent economies will continue to struggle,” he said. 

“However, it should be noted that the latter countries, such as Nigeria and Angola, have already seen a considerable deterioration in sovereign risk in recent years. While risks persist, particularly in Angola, current risk scores for these countries already incorporate the negative effects of the commodity price slump and we do not expect any further deterioration in sovereign risk this year,” he added.

One region where sovereign risk remains under pressure is Southern Africa. 

“Many credit rating outlooks remain negative due to spillover effects from the regional giant South Africa, in addition to some idiosyncratic factors. Most countries in the Southern African Customs Union (SACU) are highly dependent on trade-related receipts stemming from South African imports (due to the current SACU arrangement), and the notable drop in import demand in South Africa continues to weigh on fiscal and external balances. South Africa also forms an important export market for its neighbours, but demand remains depressed.”

Neil said that vulnerability varies considerably across countries. 

“Concerns persist, particularly related to public debt levels, and the days of unfettered growth related to the commodity price boom remain a distant memory. That being said, in general, stronger GDP growth and some structural adjustments will limit further deterioration in sovereign risk, and the overall outlook for Africa in 2018 is positive,” he concluded.