The economies of rated sub-Saharan African (SSA) sovereigns should continue to grow solidly over the coming two years, says Standard & Poor's Ratings Services today in the new report card"High Commodity Prices And Infrastructure Spending Are Fueling Growth Among Sub-Saharan African Sovereigns".
"Several factors should account for this steady growth, including high public investment spending, strong commodity exports, and increasingly diversified trade with growing emerging economies, such as China," said Standard & Poor's credit analyst Christian Esters.
Nevertheless, high infrastructure spending has kept government deficits higher than pre-crisis levels in many countries. Several governments, including those of Cape Verde, Uganda, Ghana, Gabon, Mozambique, Senegal, and Kenya, are undertaking large public investment programs. However, should budgetary financing pressures materialize, we believe that most governments have some flexibility and could delay part of their capital spending programs.
"We anticipate that continuing high oil prices should help to sustain solid current-account surpluses of some of the rated oil-exporting sovereigns in 2012, such as Nigeria and Angola," said Mr. Esters. "However, the fiscal benefit of oil revenues has in some cases been offset by spending increasing faster than revenues. This is often owing to subsidies on imported refined oil products, such as diesel."
For the rated non-oil exporting sovereigns, we expect continued high oil prices will keep up the pressure on fiscal balances as governments attempt to maintain subsidies or reduce taxes on fuel products. Sovereigns with a high dependence on a few commodities, such as Botswana (diamonds), Zambia (copper), Benin (cotton), and Burkina Faso (cotton and gold) are likely to remain similarly exposed to volatile commodity prices.
For the region as a whole, a drop in global risk appetite could also erode the confidence that foreign investors have shown in SSA markets since 2009. We therefore consider this could lead to a decrease in foreign direct investment (FDI) inflows and in portfolio inflows, although the latter are significant mostly for South Africa. Budgetary pressures in Europe and the U.S. could also slow down aid flows, which are critical to sustain public investment in many countries.
Since publishing our last report card on SSA in October 2011, Standard & Poor's has taken three rating or outlook actions and assigned one new rating in the region. We lowered the local currency long- and short-term ratings on Botswana to 'A-/A-2' in November 2011, revised the outlook on Nigeria to positive from stable in December 2011, and revised the outlook on South Africa to negative from stable in March of this year. We also assigned a 'B' rating to Rwanda in December 2011 with a positive outlook.
Of the 16 sovereigns we rate in SSA, 12 reside in the 'B' category, which limits the potential for downgrades because such a rating already factors in a high degree of vulnerability. On the other hand, only two of the sovereigns currently have a positive outlook, which reflects our view of limited potential for upward rating movements in the near term.