Sub-Sahara Africa’s favourable economic outlook balances commodity price vulnerability – Moody’s

oilDespite the risk of commodity price vulnerability, sub-Saharan African (SSA) countries will continue to grow because of favourable economic outlook and gradual structural transformation, according to Moody’s Outlook on the region.

The Outlook issued May 30, 2013 says many SSA sovereigns currently benefit from stable rating outlooks, balancing the region’s vulnerability to commodity price fluctuations with a favourable economic outlook and a credit-supportive gradual structural transformation.

The ratings agency says the creditworthiness of rated SSA sovereigns will be supported by expectations of continued average growth of 5.2% in 2013 and 5.3% in 2014.

“In contrast to previous commodity cycles, SSA countries have been able to absorb a larger share of resource wealth over the past decade and thereby improve their living standards, albeit from a very low level,” the report noted.

The agency said it expects this favourable trend to continue, driven by a set of structural factors, including net foreign direct investment (FDI) inflows, improved resource wealth management, favourable funding conditions and a potentially large growth-supportive and long-term demographic shift.

Moody’s however, sounded a caution – it said, these positive trends are offset by a lack of export product diversification, citing “a large trade exposure to China in some cases, persistent infrastructure bottlenecks in the transport and energy sectors, as well as governance challenges.”
According to Moody’s, while it expects a potential increase in bond issuance activity further to recent oversubscribed regional issuances, it notes that most SSA countries continue to have only a limited capital-absorption capacity, “the ability for servicing external debt remains largely untested in a less supportive global liquidity environment,” it adds.

The report argues that in the absence of unexpected risks — such as a re-intensification of the euro area sovereign debt crisis, a hard landing in China, or a collapse in commodity prices — SSA’s oil-exporting countries benefit from a strong growth outlook supported by improved fiscal management and moderate debt ratios in contrast to non-resource countries.

This group includes Angola (Ba3/positive), Cameroon, Chad, Equatorial Guinea, Gabon, Nigeria (Ba3/stable), Republic of Congo, it mentions.
“These factors,” it says, “are counterbalanced by a persistent low level of export diversification, institutional limitations and a lingering susceptibility to event risk in some regions, which constrain these countries’ creditworthiness.”

On the growth outlook for SSA’s mineral-rich countries – comprising Botswana (A2/stable), Ghana (B1/stable), Namibia (Baa3/stable), South Africa (Baa1/negative), Zambia (B1/stable) – it says they benefit from many new resource projects that will come on-stream over the next few years.

However, in contrast to oil-exporters, it says, most of these countries are still in the process of rebuilding their fiscal and external reserve buffers.

In terms of event risk, the report points to the simmering armed conflicts in certain areas, the negative impact of high food prices and the possibility of a series of mining code renegotiations in some countries.

However, it says, SSA non-resource economies, including Mauritius and Senegal among others, face a more subdued growth outlook given their challenge to balance investment needs with fiscal and external prudence as long as oil import prices remain elevated and global demand is languishing.

Moreover, the report points out, several SSA countries — amongst them Angola (Ba3/positive), Nigeria (Ba3/stable) and Ghana (B1/stable) — have recently established Sovereign Wealth Funds (SWFs) in order to accumulate savings in support of human and physical capital investment.

“While the establishment of SWFs supports sovereign creditworthiness, Moody’s believes that the governance of these institutions remains key to securing credit benefits,” it adds.

By Emmanuel K. Dogbevi

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