Fitch Ratings: Soaring inflation to impact African banks’ recovery

Fitch Ratings, a prominent American credit rating agency, has warned that soaring inflation could pose a significant risk to the recovery of Sub-Saharan African banks. The agency's head of Sub-Saharan Banks, Mahin Dissanayake, highlighted the potential challenges faced by financial institutions in the region during a recent interview with CNBC Africa. The discussion centered around the implications of the Ukraine-Russia conflict triggering high global inflation and slower growth, a scenario that could lead to stagflation. Dissanayake underscored the importance of assessing the risks and vulnerabilities that Sub-Saharan banks may encounter in such a challenging economic environment. According to the Fitch Ratings report, emerging market banks face more significant rating pressures compared to their counterparts in developed markets, especially in regions geographically closer to the conflict. For Sub-Saharan Africa, one of the primary concerns is the impact of soaring inflation on interest rates, consumer spending, business operations, and ultimately, the quality of bank assets. Additionally, the potential exodus of global investors from the region could exert pressure on capital markets and currencies, while the rising cost of funding for banks may further compound the challenges faced by financial institutions. Dissanayake emphasized that while South Africa is benefiting from high commodity prices, other vulnerable markets in Sub-Saharan Africa, such as Ghana, Tunisia, Kenya, and Nigeria, are grappling with high inflation rates, energy costs, and material shortages, posing risks to banks and asset quality. These adverse conditions could derail the post-COVID recovery momentum observed in the Sub-Saharan banking sector, where growth and revenue improvements were starting to materialize. Despite the bleak outlook presented by the report, Dissanayake identified potential opportunities for growth in the region, particularly in personal and SME lending segments where demand could persist. However, he noted that the interconnected nature of the global economy limits the ability of Sub-Saharan banks to shield themselves from external shocks and market uncertainties. The assessment also highlighted the vulnerabilities of non-bank financial institutions operating in emerging markets, with niche players focusing on specific customer segments facing heightened risks due to their sectoral dependencies. In particular, sectors like aircraft leasing have been significantly impacted by global shocks, including travel restrictions, reduced tourism, and lower disposable incomes. The outlook for aircraft leases remains bleak as the industry contends with rising fuel costs, COVID-19 disruptions, and potential mobility constraints for consumers. Dissanayake expressed concerns about the potential social unrest triggered by inflation-induced food shortages and price spikes, underscoring the importance of monitoring such risks globally. The report serves as a stark reminder of the delicate balance Sub-Saharan banks must navigate amid escalating inflationary pressures and uncertain economic landscapes, urging stakeholders to remain vigilant and proactive in addressing the challenges ahead.