Sovereign debt levels and debt servicing costs have risen in sub-Saharan Africa (SSA) in recent years and will continue to do so in 2016 and 2017, Fitch Ratings says. The high share of concessional debt means that interest costs are not excessive for most countries in the region, but their increase makes fiscal consolidation more challenging.
The median general government debt/GDP ratio for Fitch-rated SSA sovereigns climbed from 30.2% in 2011 to 49.7% in 2015. Our country-by-country fiscal projections imply that the median ratio will continue rising, to 51.4% in 2016 and 53.3% in 2017.
Two key drivers are the commodities slump that has led to a sharp decline in fiscal revenues among exporters, and continuing reliance by some sovereigns on infrastructure investment to drive GDP growth. Ghana will use the proceeds of this month’s USD750m Eurobond to refinance existing debt and fund capital investments. Central government capex will exceed 10% of GDP this year in Rwanda, Uganda, Lesotho, Mozambique and Ethiopia.
The debt/GDP ratio is projected to increase for all Fitch-rated SSA sovereigns other than the Seychelles in 2012-2017. But the magnitude of the increase varies. Currency depreciation and falls in nominal GDP due to lower commodity prices have also increased debt ratios in many cases, including that of Mozambique, where the metical has fallen sharply. Mozambique shows the largest increase in debt/GDP in 2012-2017 (60 percentage points), and Nigeria the smallest (3.7 percentage points). Most SSA sovereigns started from relatively low levels of debt after restructurings and debt forgiveness in the 2000s.
Rising debt has pushed up median general government interest expenditure as a proportion of revenues, from 4.8% in 2011 to 9.1% this year, and we project close to 10% next year. SSA sovereigns benefit from access to concessional lending (the median share of concessional debt in total external debt for Fitch-rated SSA credits excluding South Africa in 2014 was 62%). Only in Ghana, Nigeria and Zambia do interest costs exceed 15% of revenues, mainly as a result of high interest rates on domestic debt.
Rising debt servicing costs are an obstacle to fiscal consolidation among SSA sovereigns, and larger or unchanged deficits will lead to further increases in public debt, pushing debt ratios higher.
SSA remains one of the fastest growing regions in the world. However, while debt-funded infrastructure investment will help remove constraints on long-term growth, its benefits may not fully materialise until governance and business environments improve. As such, its near-term impact on sovereign debt ratios will be negative.
As well as rising debt, potential Fed tightening, dollar appreciation and volatile capital flows may lead to tighter financing conditions. Some capex budgets have been cut, but without revisions to overall expenditure frameworks for 2016 and 2017, debt ratios are unlikely to fall.
Fiscal risks in SSA are one of the factors reflected in the balance of sovereign rating outlooks. Six of the 18 SSA countries rated by Fitch are currently on a Negative Outlook, and there are no Positive Outlooks. Persistent fiscal deficits and growing external deficits could result in negative rating actions, especially where debt levels are already high and liquidity buffers moderate.