By Charles Leyeka Lufumpa, Acting Chief Economist and Vice President for Economic Governance and Knowledge Management at the African Development Bank Group.



After demonstrating its resilience during the Ebola outbreak and the global financial crisis, Africa is once again facing a severe test of its strength and agility because of the coronavirus pandemic.



 The good news is that the continent has entered this crisis in reasonably good shape following decades of progression in health, education and economic outcomes. As of early 2020, macroeconomic fundamentals in Africa were improving, with investments, rather than consumption, accounting for more than half of the region’s growth. Inflation was falling and the continent was making impressive strides towards accomplishing the United Nations Sustainable Development Goals (SDGs). Africa must build on the momentum and strive to prevent the coronavirus pandemic from reversing the gains of the past 20 years.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1110" height="740" src="https://www.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-1110x740.jpg" alt="" class="wp-image-379845" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-1110x740.jpg 1110w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-300x200.jpg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-768x512.jpg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-1536x1024.jpg 1536w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-2048x1365.jpg 2048w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-696x464.jpg 696w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-1068x712.jpg 1068w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-1920x1280.jpg 1920w, https://cms.cnbcafrica.com/wp-content/uploads/2020/08/Dr.-Charles-Lufumpa-002-5-600x400.jpg 600w" sizes="(max-width: 1110px) 100vw, 1110px" /><figcaption>Charles Leyeka Lufumpa</figcaption></figure>



 Admittedly, that’s easier said than done: despite their best efforts, many countries still struggle with fragile health systems, high debt levels, weak external balances, as well as high rates of poverty and unemployment. The African Development Bank now projects that Africa will fall into a recession in 2020 with economic growth contracting by at least 1.7 per cent. In a worst-case scenario, this figure could turn out as high as 3.4 per cent. Cumulative losses in gross domestic product (GDP) across the continent could range between $173.1 billion and $236.7 billion in 2020 and 2021. The coronavirus pandemic threatens to increase the debt burden of African countries from 60 per cent to 70 per cent of gross domestic product, heightening the likelihood of a sovereign debt crisis. The additional financing required to cushion the consequences of the crisis could be in excess of $150 billion.



 In a part of the world where 85 per cent of the population earn their living in the informal sector,unemployment as a direct result of the coronavirus pandemic could push an additional 28 to 49 million people into extreme poverty. Moreover, if we fail to take adequate action, the impact of the crisis on food insecurity and malnutrition may be even worse than anticipated. 



 To counter the fallout of the coronavirus pandemic, Africa needs robust policy responses from every country on the continent, paired with strong support from Africa’s development partners. In the short term, African countries should prioritise healthcare spending for the provision of essential personal protective equipment (PPE) and materials, acceleration of local production of medical supplies including PPE and vaccine and drug discovery. Targeted cash transfers and subsidies for vulnerable households as well as subsidies and tax relief for businesses should be high on the agenda. Central banks must inject liquidity into the economy, turning to unconventional policy tools such as quantitative easing if necessary. In the longer term, countries should seize the imperative of building resilience to future crises. As good times return and economies get back on track, it should become a priority to build domestic and external buffers against any potential exogenous shocks. More money should be earmarked for scientific, economic and social research. Countries should pursue global and continental partnerships to prepare for eventualities. Private sector growth and revamping education and labour markets for the future of work are also key.



 The role of development partners. At the onset of the coronavirus pandemic, multilateral development institutions took immediate action to help Africa’s poorest countries navigate the crisis and help them on the road to recovery. The African Development Bank is playing its part through its USD 10 billion COVID-19 Rapid Response Facility (CRF). The CRF offers immediate relief to African countries to address the crisis by providing additional resources for public health interventions, social protection programs and liquidity and budget support to affected sectors of their economies.



 Civil society and think tanks have a useful role to play by helping to build trust, solidarity and uptake of COVID-19 prevention and containment measures. They can also help to ensure that COVID-19 interventions are carried out equitably and that governments are held accountable for their policies and actions. The African Development Bank stands ready to work with other multilateral financial institutions and wealthier nations to alleviate the impact of the pandemic on African countries. 



 The continent’s youthful and innovative population, its growing middle class, its value addition to the abundant natural resources and its ever-improving governance systems give us plenty of reason to be confident that Africa will overcome the ravages of the coronavirus pandemic.



 This year marks the first time the continent has entered a recession in more than half a century. Over the past two decades, Africa has boasted some of the highest growth rates in the world, setting the region up as the next investment frontier in a post–COVID-19 world. The level of cooperation in Africa has been encouraging. But beyond the crisis, we need to continue working together to help rebuild our economies and prepare them for the future. Africa will emerge from this episode stronger and more resilient than ever before.

Dr. Charles Lufumpa (002) (1)

OPINION: Post COVID-19-Rebuilding Africa and strengthening it against future economic shocks.

Fitch Ratings-London/Hong Kong-26 June: The South African government&#8217;s intention to stabilise debt levels within four years, as set out in this week&#8217;s emergency budget, is unlikely to be achieved, Fitch Ratings says. This reflects persistent challenges in reducing expenditure, boosting growth and insulating public finances from struggling state-owned enterprises, as well as reflecting the impact of the coronavirus pandemic, which will drive a sharp rise in debt/GDP this year.



Wednesday&#8217;s emergency budget revised the consolidated budget deficit projection for the current fiscal year (FY21; ending March 2021) to 15.7% of GDP, over double the 6.8% projected in the original budget in February. The main factor is a sharp fall in tax revenues due to the economic fall-out resulting from lockdown measures, as well as the general hit to the economy and some tax relief. The government expects the main budget revenues to be ZAR300 billion &#8211; 6% of GDP &#8211; lower than previously anticipated.



South Africa has recorded 100,000 coronavirus cases and this number could rise substantially, according to government modelling. Nevertheless, the government expects non-interest expenditure to be just ZAR36 billion (0.7% of GDP) larger than projected in February, as the emergency budget plans to offset substantial additional spending on health and economic support through savings in other areas.



We view the government&#8217;s forecast of gross loan debt rising to 81.8% of GDP in FY21, much higher than the 65.6% in the original budget, as realistic. However, we believe its expectation that debt will peak at 87.4% in FY24 is optimistic. This would require sufficient fiscal consolidation to achieve a primary budget surplus in that year, which would be South Africa&#8217;s first since 2008, towards the end of the commodity boom.



The government aims to cut expenditure by ZAR230 billion over FY22 and FY23 relative to earlier plans and then implement additional cuts, complemented by small tax-raising measures. Details will be presented in the Medium-Term Budget Policy Statement in October.



Revenue projections beyond the current fiscal year appear conservative, and revenues may exceed government forecasts (the government predicts that revenues will still be ZAR202 billion below its February projections in FY23). However, Fitch believes planned expenditure cuts seem ambitious not least because they would significantly weaken the economic recovery. South Africa&#8217;s recent experience highlights the challenges of meeting fiscal targets. February&#8217;s budget abandoned the earlier target for a primary budget balance by FY23 (excluding support for state-owned electricity company Eskom).



Social and political factors, including exceptionally high inequality, powerful trade unions and deep divisions within the governing African National Congress, present significant hurdles for spending cuts. For example, the government has still not agreed the wage bill savings with public sector trade unions for FY21 that were included in the February budget. A comprehensive adjustment of the large public sector wage bill may not be possible until the current three-year agreement expires in April 2021, and negotiations then are likely to be difficult.



Key reforms to Eskom that would support the economy and reduce the burden on the public finances, and relatively minor measures to accelerate GDP growth, have also faced significant political hurdles. Although the challenges in restructuring state-owned flag carrier South African Airways, which filed for business rescue protection last December, are small from a macroeconomic standpoint, they illustrate the difficulty in addressing budget pressures from troubled state-owned enterprises in the face of trade union opposition. Our downgrade of South Africa&#8217;s Issuer Default Rating to &#8216;BB&#8217; on 3 April resulted from the lack of a clear path towards government debt stabilisation as well as the expected impact of the coronavirus pandemic-related shock on public finances and growth. The Outlook on the rating is Negative. A continued rise in government debt/GDP and failure to formulate a clear and credible path towards stabilising the government debt/GDP ratio could lead to negative rating action

SA Finance Minister Tito Mboweni delivers his emergency budget

#SpecialBudget2020: Finance Minister Tito Mboweni delivers emergency budget (full speech)

South Africa unlikely to sort out its debt in four years – Fitch.

By Jee-A Van Der Linde – Economist



Finance ministers of East Africa are expected to table their respective budgets in coming days for the new financial year that begins on July 1. The reading of East African budgets is normally a joint exercise.



The new budgets come at a pivotal time, as the unexpected Covid-19 pandemic has placed pressure on government finances in 2020.



Authorities have little choice but to provide fiscal support where they can. However, there will be challenges and the governments will need to closely monitor developments to avoid the budget deficits from spiralling out of control.



Government finances will take a hit across the region. We believe that this will for the most part be driven by the collapse in fiscal revenue due to the marked deterioration in the economic outlook.



The region’s largest economy, Kenya, has provided fiscal support through tax relief, which will further weigh on the revenue side.



In general, on the expenditure side we expect to see a lot of reprioritisation away from sectors that have seen activity halted due to the Covid-19 pandemic. This could include a reduction in direct spending in the tourism sector and construction.



These resources will likely be redirected towards containment efforts – particularly health care – and social support.



Regardless, East African fiscal finances will look a lot worse during the next fiscal year than what was expected a few months ago. Fiscal deficits will be wider than previously anticipated and public debt will increase at a faster rate.



We have seen multilaterals stepping up support, which could reduce the longer-term fiscal impact of the Covid-19 crisis, but commitments to date will undoubtedly have to be supplemented to ensure that the Covid-19 pandemic does not have a long-term fiscal legacy.



Furthermore, most East African nations have been able to assess the impact of the virus and incorporate this new reality into their budgets.



This is a lot more efficient than having to adjust a budget midway through a fiscal year.



Rwanda, the region’s fastest-growing economy in 2019, is to delay publishing its budget for the new financial year. The break from tradition comes down to the Rwandan Cabinet not yet having approved the finance minister’s budget proposal.



The government expects to spend RWfr3.245trn during the fiscal year 2020/21 – RWfr228.7bn more than the revised budget estimates.



Although we do not expect government to curb non-essential expenditure during this time, stimulus measures to fight against the fallout of the virus are unavoidable.



Rwanda’s fiscal deficit is expected to widen this year, in step with its regional peers. Moreover, public debt levels have risen over the years and 2020 will be no exception.



Given the extraordinary circumstances, forecast adjustments are likely.



Room to deploy fiscal policy to combat Covid-19 is limited.



It seems investors globally have made peace with the fact that many countries will have to increase borrowing to combat the pandemic, and if containment efforts show positive results, these countries should not struggle to find capital to fund the recovery.



The East African region is fighting an economic battle on two fronts.



Covid-19 is disrupting supply chains, curtailing economic activity at large and devastating regional tourism.



Meanwhile, the unprecedented locust infestation is wreaking havoc in the region’s agricultural sector – an industry generally spared from the Covid-19-induced economic slump.



The World Bank announced the commencement of an emergency programme to help countries in Africa fight the ongoing locust infestation.



The Bank noted that the first East African countries to be financed under the initial phase of the programme are Djibouti, Ethiopia, Kenya, and Uganda, with a total financing package of $160m.



Despite this support, the unprecedent nature of both the Covid-19 pandemic and the locust infestation will derail the region’s economic growth trajectory.



We expect Africa’s fastest-growing region to record a 1.8% GDP contraction this year.



For more coverage on COVID-19 visit: <a href="https://www.cnbcafrica.com/covid-19/">https://www.cnbcafrica.com/covid-19/</a>

Op Ed: East African finance ministers to present budgets for new fiscal year

By Stephán Engelbrecht, Fund Management



The world is entering an unprecedented time and there is no historical playbook for what happens next. While not our base case, calamity risk is increasing (mass infections across South Africa [SA], with dire economic consequences), and nobody knows how to quantify this risk. We have many requests from clients asking for investment opportunities in this crash and we are happy to share our fundamental views. However, investors in any equities must bear in mind that, in the shorter term, cheap shares can get even cheaper and wild swings are likely. Our views are based on a 12-to 24-month timeline, with a base case scenario of the world normalising during this time period. So, risks have to be taken into account and any investment in equities should be considered in this context. Shares only become this cheap when risks are extremely high.



In times of extreme market volatility (and corrections), it is often unnecessary for investors to look far down the quality curve to find attractive opportunities that will generate significant returns in future. This is oftentimes the correct strategy as those economic uncertainties causing market volatility can have far more dire consequences for lower-quality businesses. This can make a company look inexpensive on the surface, but the upside might be limited as the business first has to struggle through an earnings trough, or raise equity to shore up its balance sheet which will, in turn, dilute current shareholder returns.



However, sometimes it is worth taking the risk. During market corrections, fundamentals are often ignored, and some market participants will sell a share at any price. It is at these prices where, we believe, the risk-return profile is so attractive that these counters deserve a small allocation in a diversified portfolio. These calculated risks may just turn out to be some of the best performers in an investor’s portfolio.



With that as background, we have scoured the SA market for some very exciting investment opportunities. We concede that these opportunities do come with some risks, whether it be debt, currency, regulation, liquidity or, in some cases, a combination of these factors, associated with them. Nevertheless, we believe that, at current valuation levels, the investor is more than compensated for such risks. So, put your hard hat on and prepare for some volatility although, at the end of the day, we are confident that a portfolio of these shares will reward investors handsomely.



MTN Group



If one were to draw up a list of countries where it is notoriously difficult to do business, and that also have extremely volatile regulatory and economic environments, the chances are that a large number of these nations will be among the 21 countries in which MTN operates. Initially, with major global mobile operators reluctant to enter these markets and regulations being fairly light, these countries held the appeal of attractive emerging market (EM) growth potential, with limited competition, for MTN. While this worked well in the beginning, over recent years MTN has appeared to stumble from one exogenous shock to the next – wars, extreme currency volatility, sanctions, exorbitant regulatory penalties and various lawsuits – but the company has weathered all these setbacks. MTN’s vulnerability to these exogenous events means that it is typically sold off, particularly aggressively during periods of risk aversion. This time around, the market sell-off was amplified by the collapse in the oil price, to which a number of MTN’s markets are vulnerable (especially Nigeria). With MTN’s share price falling below R40, the counter has now declined &gt;85% from its 2014 peak and it is currently trading at levels last seen in 2005.



In an industry where scale is critical, the significance of MTN being a top-two market share operator across all the markets in which it operates should not be underestimated. Where the telecommunications sector globally has largely been consigned by investors to the status of an ex-growth utility, MTN stands apart for several reasons. First, many of the Group’s markets still have further opportunities to increase penetration of mobile telecommunications and the potential to migrate those users to smart devices and drive data adoption. Second, while most developed market (DM) operators are confined to the provision of commoditised voice and data services, MTN is capitalising on opportunities to also add digital and mobile financial services.



Although MTN CEO, Rob Shuter has announced that he will be leaving the company at the end of his contract in one year’s time, he assembled a very competent management team during his tenure. Shuter has set the Group on a self-correction course. This includes the disposal of non-core assets, with proceeds being used to pay down debt (R14bn in sales were raised in the first year, with guidance of a further R25bn to be realised over the next few years) and paying particular attention to turning around some of the Group’s underperforming business units.



Since many of MTN’s new revenue streams do not require significant capital investment and are delivered through over-the-top platforms already in place, it has enabled the company to provide guidance of low double-digit revenue growth, margin expansion and relatively flat capital expenditure over the next 3-5 years. With the strong double-digit growth in free cash generation that this guidance implies, MTN is targeting annual dividend growth of 10%-20%.



Even at the bottom of the dividend guidance range, the prospective dividend yield is 15%, while the price as a multiple of expected earnings in 12 months’ time is 5x. No doubt, Brent Crude oil at below $30/bbl poses risk in the short term of foreign exchange availability and currency devaluation in Nigeria (MTN’s largest profit generator in FY19, accounting for c. 40% of group EBITDA). However, we are mindful of the oil industry saying, “the best cure for low oil prices, is low oil prices” and it is unlikely that the current situation will be sustained long term. At current levels, we believe there is now enough of a margin of safety in MTN’s share price to compensate for the risks it presents, with the potential for a strong recovery as current headwinds abate.



Investec



Over the past four decades, Stephen Koseff and Bernard Kantor created an institution. Built on the foundation of entrepreneurship and being agile and nimble to service its customers, the distinctive zebra logo became one of the most widely recognised symbols in SA financial markets.



In the early 2000s, Investec started to expand offshore with the UK being a key target market. Unfortunately, the UK’s highly competitive banking environment, ever more draconian and complex regulation and a global financial crisis (GFC) that hit just as Investec started to expand aggressively in the UK, made the experience far more lacklustre than the firm’s local successes. However, the company stayed the course, and, over time, Investec has built a strong UK presence.



Nevertheless, the UK remains a considerable drag on the Group’s profitability and ROE. Since the disastrous acquisition of Kensington in 2007 and the harsher regulatory environment post the 2008 GFC, Investec’s UK division has struggled to achieve a ROE greater than its cost of capital. This has resulted in Investec rightfully trading at a discount to its book value for significant periods since the GFC.



This discount to book value reached extremely low levels during the current sell-off, trading at close to 0.3x book. In addition, it coincides with some real positive changes taking root at Investec. The old guard has moved on and the new management team have taken decisive steps to improve the profitability of the bank.



Management unbundled the asset management division to make the structure less complex, committed to improving the cost-to-income ratio in the UK and promised that there were no sacrosanct segments of the business that will not be cut in the event of underperformance. We are still at the initial stages of the new regime and it will be interesting to see whether management can indeed improve the UK division’s ROE.



Although we acknowledge that Investec is not the highest-quality bank in the world and its earnings growth and ROE profile are far more volatile than its SA peers, we believe that the current share price provides an opportunity to enter at depressed multiples that more than sufficiently reflect the lower quality. And, the investor may yet benefit from an improvement in operating metrics as the new management team start their work.



Redefine



In recent years, many SA (and global) conservative investors squirrelled their savings away in property shares to earn an attractive, growing income. This bubble burst over the last few months and even the highest quality property companies have seen their value decimated. Selected YTD (to 25 March) declines among local property counters include Growthpoint (-45%), Redefine (-74%), Resilient (-46%), Nepi Rockcastle (-40%), Vukile (-63%), Attacq (-58%) and Hyprop (-60%). This follows already steep share price drops across the board in 2019.



The dire economic outlook for SA had already impacted Redefine’s share price hard when the novel coronavirus (COVID-19) hit and the whole property sector is now in crisis. These are unprecedented times and the world has changed in the last few weeks. Some tenants (especially in the retail sector) will earn little or no turnover for some time, and we have no doubt that they will want to renegotiate rentals with landlords. Some smaller tenants will go bankrupt. It is clear to us that the property sector will be reset after panic around the virus has subsided. Thus, the fate of many property companies is largely dependent on SA banks, who have very strong balance sheets and who, we believe, will be very co-operative in working with these companies to navigate the way through the current crisis. Although loan-to-value (LTV) ratio levels are all stated in the debt covenants for property companies, we think that the credit providers’ focus will turn from LTV ratios to interest cover, cash flow and sustainability. It is not in the interests of the banks to “pull the plug” on some of their biggest clients. We expect Redefine to work its way through this scenario together with the banks, with “reset” value emerging.



Management have acknowledged that they have no idea where rentals will settle, and they will largely depend on the health of the economy and the tenant. About 30% of retail turnover is from “safe” companies such as food retailers, cellphone companies and banks. Many office tenants will remain robust and industrial/logistics rentals will depend on tenant quality. So, it is not a disaster across the board, but months of hard negotiations will follow.



However, for investors, LTV ratios will remain a key metric and something which Redefine will have to address. At its last results presentation (FY19), Redefine had an LTV ratio of 43%. To highlight the spiral, if we assume the company had R100 of book value and R43 of debt – that 43% LTV is only just within its debt covenants. If the book value is written down by 25%, the LTV ratio goes up to 57%! Asset sales are usually a partial solution, but this looks increasingly unachievable. Withholding dividend payments becomes the next, and most likely, scenario. If a company can generate an 8% yield on book value (we are assuming no tax payable, which may be contentious), ploughing this back into debt repayments (as opposed to dividends), with a two-year dividend holiday, can reduce the LTV ratio from 57% to 41% – back into the covenant zone. We note that Redefine has already announced a delay in its interim dividend payment.



A big issue with withholding dividends is taxation. REIT (Real estate investment trust) legislation allows companies designated as such, to not pay tax and to distribute income to shareholders who receive the distribution as taxable income. If REITs do not distribute 75% of their income, then the current rules say they must pay tax on their income. We believe the property sector is in the process of negotiating with Treasury in an attempt to waive this rule – at least for a once-off time period.



We conclude that in a base-case scenario, the adjusted book value will be well below current book values, but higher than the share prices. We calculate that Redefine is fundamentally worth 50%-100% more than its current share price (unless Armageddon prevails!). But there is a high risk of shareholders not getting dividends for one, or even two, years. The share price is factoring in a far worse scenario than our base case. But investors should focus on the balance sheet and track closely the progress the firm makes in degearing.



There is a long road ahead, but we believe that, in the end, we will look back at this as a great opportunity to buy the share.



Northam Platinum



The platinum group metals (PGM) miners were the talking point of 2019. After being priced for bankruptcy in 2018, the price of the PGM basket recovered in 2019 resulting in the share prices of these miners rallying by 250% or more. The higher basket price helped these miners reduce their leverage with some of the mining companies going into a net cash position. It was a remarkable turnaround and highlighted just how cyclical the fortunes of these businesses are. Which begs the question, do you want to buy into such a cyclical industry in these uncertain times?



It is a fair question, and the answer very much depends on the risk tolerance of the investor. The reason why we are comfortable with a small position in Northam is due to the precarious demand-supply balance which the industry faced going into the COVID-19 crisis.



Prior to 2019, the threat of electric vehicles (EVs) caused the PGM basket price to remain below the breakeven price for mining companies and they battled to survive. Capital expenditure was cut across the board, with mining firms struggling to pay for maintenance capex, not to even mention expansionary capex.



Then, in 2019, the combination of a greater focus on carbon emission worldwide, the more enhanced testing after the VW scandal and the lack of R&amp;D in combustion engines over the preceding few years forced vehicle manufacturers to just add more and more PGMs in their respective catalytic converters as emission standards became more onerous. With the costs of PGMs &nbsp;a small fraction of the total vehicle production cost, they had the luxury to do this. Demand for these metals surged and the miners were not in a position to increase supply. This caused PGM prices to rally, with rhodium and palladium hitting all-time highs.



In our view, this situation will not change in the short- to medium-term, despite the COVID-19 outbreak and the subsequent decline in global vehicle sales. We expect demand to remain strong due to higher emission standards. Importantly, the threat of EVs, which are expected to be close to 50% of global vehicle sales by 2030, will prevent PGM miners from investing in new mines, thus keeping a constraint on the supply response.



Northam is one of the few PGM miners that will see strong volume growth over the next few years. Due to some tough decisions taken by management during the lean years, the company was able to shore up its balance sheet and it continued to invest in operations. As a result, we expect Northam’s annual production volumes to increase from c. 600k ounces this year to 1mn ounces over the next few years. Northam’s mines are also of a very high quality, operating at very low operating costs due to mechanisation. Trading at very attractive valuations and offering significant earnings (at spot PGM prices) and production growth, Northam is a high-quality operator in a very cyclical industry.



Alviva Holdings



Alviva Holdings is not an exciting company! But it is one of the Africa’s largest providers of information and communication technology (ICT) products and services. The Group has three business segments – ICT Distribution, which imports ICT hardware and software and sells it into sub-Saharan Africa via resellers, Services and Solutions, which provides system integration and ICT solution services, and Financial Services, which provides leasing finance to small-, medium- and micro-sized enterprises (SMMEs) for their ICT products.



The risks to this business are real. It is difficult to see Alviva continuing to operate in the same verticals and products as it is currently working, in five years’ time. This is due to the ever-changing industry in which it operates. For example, cloud storage and processing will, likely, fundamentally change the role ICT service providers play in the lives of their customers. To survive, ICT service providers will have to adapt their business models quickly and also ensure that they have a balance sheet strong enough to absorb any shocks.



We believe that Alviva has both these traits. It has a very experienced and conservative management team, which have navigated through some very turbulent times in the past and we maintain that management should be able to continue to do so in future. In addition, management have also been conserving cash. Over the past few years, they have adopted a very conservative dividend policy, paying out only 10% of earnings in dividends.



At our last engagement with management, they conceded that the operating environment is very tough at the moment, adding that they were very disappointed in the company’s performance but that it should improve in the second half. Management have guided that they will first look to retire around R400mn in preference shares, after which they will engage with shareholders regarding potential share buybacks. Admittedly, this was before the COVID-19 outbreak.



However, Alviva’s valuation is ridiculous – it is currently trading at a historic PE ratio of c. 2x and a normalised free cash flow yield of 50% (and we believe that we are being conservative here), so the risk-reward profile for investors is very much skewed to the upside. Liquidity is a concern and we highlight that investors should be patient if investing in this counter.

Our top share picks for the brave investor: Finding opportunities in times of adversity

New York, March 31, 2020 &#8212; Moody&#8217;s Investors Service (&#8220;Moody&#8217;s&#8221;) has today placed Angola Government&#8217;s B3 long-term issuer ratings and senior unsecured rating and its (P)B3 senior unsecured MTN rating under review for downgrade. The short-term issuer rating is affirmed at Not Prime (NP).



The decision to place Angola&#8217;s ratings on review for downgrade is prompted by the magnitude of the shock from the sharp drop in oil prices and an acute tightening in global financing conditions on Angola&#8217;s already weak public finances and external position, and elevated government gross borrowing requirements. Weak governance, notwithstanding a number of reforms implemented in recent years, undermines the government&#8217;s capacity to respond to this shock and is a driver of this rating action.



The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. For Angola, the shock mainly transmits through a further weakening in the currency that raises the debt burden and debt service; a significant drop in revenues that is likely to prevent the government from pursuing its debt management strategy of paying down short-term debt and reducing rollover risk; and pressure on an already fragile balance of payments.



The review period will allow Moody&#8217;s to assess the overall policy response to the shock and the capacity of the authorities to manage: 1) the additional stress on public finances and the government&#8217;s balance sheet driven by the significant loss of oil-related revenues and a potential further depreciation of the currency; 2) the severity of the increase in external vulnerability given the expected sharp drop in oil export receipts putting pressure on foreign currency reserves; 3) the rising risks associated to large domestic and external debt service payments in a currently dislocated credit market.



Concurrently, all Angola&#8217;s country risk ceilings remain unchanged: Foreign Currency bond ceiling at B2, Foreign Currency deposit ceiling at Caa1, and Local Currency bond and deposit ceilings at Ba3.



RATINGS RATIONALE



RATIONALE FOR INITIATING A REVIEW FOR DOWNGRADE ON ANGOLA&#8217;S B3 RATINGS



As a result of the oil price fall in the face of depressed oil demand and a slow supply response, Moody&#8217;s now assumes that oil prices will average US$40-45 per barrel in 2020, and US$50-55 by 2021, around $20 and $10 below previous expectations in each year.



As a large oil exporter, Angola heavily relies on the oil sector as a source of government revenue (62% of total revenue in 2019) and exports (96%). Such a fall in oil prices heightens the pressure on Angola&#8217;s already weak fiscal and external metrics.



ANGOLA&#8217;S WEAK CREDIT METRICS ARE LIKELY TO DETERIORATE FURTHER, TO AN EXTENT PARTLY DETERMINED BY THE GOVERNMENT&#8217;S CAPACITY TO RESPOND



Angola&#8217;s credit profile is weakened by the oil price shock which negatively affects the government&#8217;s balance sheet and the country&#8217;s external position, through a significant loss of government revenue and export proceeds respectively. Also, the Covid-19 related spending to prevent the spread of the virus throughout the country is expected to further aggravate the fiscal deficit.



Already, Angola&#8217;s fiscal and external metrics are very weak. General government debt increased to an estimated 100.5% of GDP in 2019, from 81% in 2018, and debt-to-revenue was around 500% from 371% respectively. Similarly interest payment-to-revenue exceeded 25% in 2019 against 20.7% a year before. On the external side, vulnerability relates to low net foreign exchange reserves at $11.8 billion at the end of 2019, covering around 6 months of imports of goods and services and external debt amounting to about twice the level of current account receipts this year, according to Moody&#8217;s estimates.



Angola is unlikely to be able to significantly increase its oil production that has been in a secular decline for the last 4 years to offset the price drop. Moody&#8217;s estimates that a $10/barrel decrease in oil price leads to a $2$2.5 billion loss in government revenue (around 3% of 2019 GDP) and a $5 billion fall in exports receipts.



The 2020 budget which was designed to post a small surplus (0.8% of GDP), was passed with a $55/barrel oil price assumption. It would have contributed to a slightly positive balance of payments after International Financial Institutions&#8217; (IFIs) disbursements of concessional loans. As a result of the price fall, Angola&#8217;s fiscal and external accounts will be in deficit, raising pressure on the exchange rate and foreign exchange reserves and incentivizing economic transactions in the parallel exchange rate market.



A budget no longer likely to be in surplus and further pressure on the currency are likely to raise the already very high debt burden. In turn, the government&#8217;s borrowing requirements are likely to increase again in 2020 having fallen to 15% of GDP in 2019 (including clearance of arrears to goods and services suppliers), at a time when international and possibly domestic financing comes at very high costs. Given the current dislocation in credit markets, it will be increasingly challenging for the government to secure financing at affordable costs. Previous objectives, including an ongoing debt management strategy aimed at repaying short-term debt and lengthening its debt maturity and the maintenance of net international reserves above $10 billion have also become far less achievable.



The impact of the oil price shock will be attenuated by the fact that the government posted a small deficit on the budget estimated at 0.3% of GDP and a current account surplus estimated at 4% of GDP in 2019. This is due to the implementation of a vast array of reforms, and strong consolidation efforts under the $3.7 billion and 3-year IMF program, approved in December 2018. But during this transition period, where the authorities, with the support of the IFIs, are trying to spur the private sector, restore macroeconomic stability with a more flexible exchange rate and sounder public finances, having cleared large amount of arrears and improved the debt structure, Angola&#8217;s credit metrics remain highly vulnerable to shocks.



The review period, which may extend beyond the usual three-month horizon, will allow Moody&#8217;s to assess the credibility and sustainability of the government&#8217;s plans and its ability to mitigate the impact of significantly lower oil prices on Angola&#8217;s credit standing.



ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS



Environmental considerations are not material for Angola&#8217;s rating.



As an oil producer and exporter, Angola&#8217;s environmental risks derive from carbon transition. Angola&#8217;s credit profile would face downward pressure in a scenario of rapid global transition to lower reliance on hydrocarbons that would depress global hydrocarbon demand and prices. However, in light of the measures against climate change taken so far, this is not Moody&#8217;s baseline.



Social considerations influence Angola&#8217;s credit profile, given very low wealth levels and high levels of poverty. GDP per capita, at $6,851 on a PPP basis as of 2018, remains low. Additionally, the UN&#8217;s Human Development Index for 2018 ranked Angola 147 out of 189 countries. Social indicators have improved from a very low level since the end of the civil war in 2002, but income inequalities remain very high despite the oil wealth of the country. Since the oil shock and the election of President Lourenco, the authorities have been implementing an ambitious reform agenda despite the political cost and inherent execution risks. Risk of social unrest remains, especially stemming from jobless young people.



Governance considerations are material to Angola&#8217;s credit profile and are a driver of this action. Data transparency and availability are areas of improvements, as well as institutional capacities that remain limited. For example, Angolan banks lost their dollar-correspondent banking relationships in 2016 because of their failure to meet international standards relating to shareholder structures and money laundering, resulting in increased transaction costs and delays. There are also significant weaknesses related to the management of public finance, illustrated by the level of arrears accumulated over the last few years.



FACTORS THAT WOULD LEAD TO A DOWNGRADE OF THE RATING



Moody&#8217;s would downgrade the rating if the review were to conclude that Angola&#8217;s government was unlikely to be able to alleviate the damage to its balance sheet and the subsequent rise in liquidity risk resulting in a credit profile no longer consistent with a B3 rating. Increasing risks of a balance-of-payment crisis would also likely lead to a downgrade.



WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL



Moody&#8217;s would confirm the rating if the review were to conclude that a credible fiscal and economic policy response from the government will efficiently manage the risks arising from the upward trend in government debt, government liquidity risks, and increased pressure on the exchange rate, leaving Angola&#8217;s credit profile consistent with a B3 rating.



GDP per capita (PPP basis, US$): 6,851 (2018 Actual) (also known as Per Capita Income)



Real GDP growth (% change): -1.2% (2018 Actual) (also known as GDP Growth)



Inflation Rate (CPI, % change Dec/Dec): 18.6% (2018 Actual)



Gen. Gov. Financial Balance/GDP: 2.2% (2018 Actual) (also known as Fiscal Balance)



Current Account Balance/GDP: 7% (2018 Actual) (also known as External Balance)



External debt/GDP: 44.4% (2018 Actual)



Economic resiliency: b2



Default history: No default events (on bonds or loans) have been recorded since 1983.



On 26 March 2020, a rating committee was called to discuss the rating of Angola, Government of. The main points raised during the discussion were: The issuer&#8217;s economic fundamentals, including its economic strength, have materially decreased. The issuer&#8217;s fiscal or financial strength, including its debt profile, has materially decreased. The issuer&#8217;s susceptibility to event risks has not materially changed.



The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at <a href="https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631">https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631</a> . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.



The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.



The local market analyst for this rating is Aurelien Mali, +971 (423) 795-37.



REGULATORY DISCLOSURES



For further specification of Moody&#8217;s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody&#8217;s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx? docid=PBC_79004.



For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody&#8217;s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider&#8217;s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.



For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.



The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.



These ratings are solicited. Please refer to Moody&#8217;s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.



Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.



Moody&#8217;s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at <a href="https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569">https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569</a> .



At least one ESG consideration was material to the credit rating outcome announced and described above.



The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody&#8217;s affiliates outside the EU and is endorsed by Moody&#8217;s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody&#8217;s office that issued the credit rating is available on www.moodys.com.



Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody&#8217;s legal entity that has issued the rating.



Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.



Samar Maziad



Vice President &#8211; Senior Analyst



Sovereign Risk Group



Moody&#8217;s Investors Service, Inc.



250 Greenwich Street



New York, NY 10007



U.S.A.



JOURNALISTS: 1 212 553 0376



Client Service: 1 212 553 1653



Marie Diron



MD &#8211; Sovereign Risk



Sovereign Risk Group



JOURNALISTS: 852 3758 1350



Client Service: 852 3551 3077



Releasing Office:



Moody&#8217;s Investors Service, Inc.



250 Greenwich Street



New York, NY 10007



U.S.A.



JOURNALISTS: 1 212 553 0376



Client Service: 1 212 553 1653

Moody’s places Angola’s B3 ratings on review for downgrade

South Africa&#8217;s Moody&#8217;s reprieve is over. The rating agency, the last to rate the country investment grade, has cut South Africa’s sovereign credit rating to junk <a href="https://www.cnbcafrica.com/news/2020/03/27/moodys-to-cut-south-africas-sovereign-credit-rating-to-junk-economists/">in line with economists&#8217; forecast</a>. This comes as the country&#8217;s recession deepened by the impact of COVID-19 frustrates its economic reform efforts and stifles its plans to reduce government debt.



The action will result in South Africa&#8217;s expulsion from the World Government Bond Index (WGBI), as a consequence those funds tracking this index as a benchmark will become forced sellers.



<a href="https://www.cnbcafrica.com/insights/sa-downgrade/2017/11/24/sa-downgrade-2/">Analysts have warned </a>that the magnitude of this forced selling could be as high as $8 billion (R141 billion at R17.64 exchange rate).&nbsp; 



Moody&#8217;s issued the following statement explaining its reasons: 



Moody&#8217;s Investors Service, (&#8220;Moody&#8217;s&#8221;) has today downgraded the Government of South Africa&#8217;s long-term foreign-currency and local-currency issuer ratings to Ba1 from Baa3. The outlook remains negative. A Ba1 rating is judged to have speculative elements and a significant credit risk. 



READ: <a href="https://www.cnbcafrica.com/news/financial/2020/03/28/governments-response-to-moodys-downgrade-of-sa-to-junk-status/">SA government&#8217;s response to Moody&#8217;s downgrade </a>



The key driver behind the rating downgrade to Ba1 is the continuing deterioration in fiscal strength and structurally very weak growth, which Moody&#8217;s does not expect current policy settings to address effectively.



Both outcomes speak to weaker economic and fiscal policy effectiveness than Moody&#8217;s previously assumed.



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The negative outlook reflects the risk that economic growth will prove even weaker and the debt burden will rise even faster and further than currently expected, weakening debt affordability and potentially, access to funding.



Moody&#8217;s also downgraded South Africa&#8217;s long-term foreign-currency and local-currency senior unsecured debt ratings to Ba1 from Baa3, its foreign-currency senior unsecured MTN and senior unsecured Shelf ratings to (P)Ba1 from (P)Baa3, as well as its foreign-currency other short-term rating to (P)NP from (P)P-3.



In a related action, Moody&#8217;s downgraded ZAR Sovereign Capital Fund Propriety Limited&#8217;s foreign currency, backed senior unsecured debt rating to Ba1 from Baa3 and maintained its negative outlook. ZAR Sovereign 



Capital Fund Propriety Limited is a special purpose vehicle whose debt issuance is ultimately the obligation of the South African government.



All South Africa&#8217;s long-term country risk ceilings were revised down by one notch. Its long-term local-currency bond and bank deposits ceilings were revised down to A3 from A2, and the long-term foreign-currency bond ceilings to Baa1 from A3. The short-term bond foreign-currency ceiling remained unchanged at Prime-2. Moody&#8217;s also lowered the long-term foreign-currency bank deposits ceilings to Ba1 from Baa3 and the short-term foreign-currency bank deposits ceiling to Not Prime(NP) from Prime-3.



RATINGS RATIONALE



RATIONALE FOR THE RATING DOWNGRADE TO Ba1



STRUCTURALLY VERY WEAK GROWTH AND CONSTRAINED CAPACITY TO STIMULATE THE



ECONOMY



Unreliable electricity supply, persistent weak business confidence and investment as well as long-standing structural labour market rigidities continue to constrain South Africa&#8217;s economic growth. As a result, South Africa is entering a period of much lower global growth in an economically vulnerable position. The government&#8217;s own capacity to limit the economic deterioration, in the current shock and more durably is constrained. Fiscal space is very limited and looser monetary policy will not address underlying structural problems. The unprecedented deterioration in the global economic outlook caused by the rapid spread of the coronavirus outbreak will exacerbate the South Africa&#8217;s economic and fiscal challenges and will complicate the emergence of effective policy responses.



Progress on structural economic reforms has been very limited. Some initiatives to improve competition and encourage job creation have progressed, but none that constitute a step-change for the economy. 



Structural issues such as labour market rigidities and uncertainty over property rights generated by the planned land reform remain unaddressed. 



Moreover, a strategy to stabilize electricity production has been slow to emerge and has yet to prove its effectiveness. Moody&#8217;s assumes that while power supply will become more reliable, the restoration of full capacity will take some years to complete. As a result, after the immediate sharp downturn, growth will remain very low in the following years.



INEXORABLE RISE IN GOVERNMENT DEBT OVER THE MEDIUM TERM



South Africa&#8217;s debt burden will rise over the next five years under any plausible economic and fiscal scenario.



Debt-to-GDP increased by 10 percentage points (ppts) over 2014-18 and will rise by a further 22 ppts over 2019-23 under Moody&#8217;s baseline projections. Over that timeframe, Moody&#8217;s expects primary deficits to persist. The fiscal deficit will widen in fiscal 2020 to around 8.5% of 



GDP, as revenue declines this year, only narrowing very gradually thereafter. Fiscal strains from interest payments and support to state-owned enterprises will continue.



In this context, and consistent with the recently announced budget, any fiscal consolidation will rest primarily on containing the large and growing public sector wage bill. The government aims to achieve ZAR160 billion (3% of GDP) in savings over the next three fiscal years by keeping wage growth below inflation. That would mark a material departure from current agreements and past outcomes, and as such is likely to prove challenging to implement. Moody&#8217;s expects expenditure on wages to exceed budget at least in 2020.



Interest rates are likely to rise above the levels assumed in the budget and nominal growth will be weaker. Moody&#8217;s estimates that the debt burden will reach 91% of GDP by fiscal 2023, inclusive of the guarantees to state-owned enterprises from 69% at end of fiscal 2019. Even if the government&#8217;s plans to restrain wage growth were fully implemented, debt-to-GDP would still continue to rise significantly. Similarly, even under a scenario of more effective improvement in tax compliance and falling interest rates from fiscal 2021, government debt would still rise to around 87% by 2023.



RATIONALE FOR THE NEGATIVE OUTLOOK



The negative outlook reflects downside risks around economic growth and fiscal metrics, that could lead to an even more rapid and sizeable increase in the debt burden, further lowering debt affordability and potentially weakening South Africa&#8217;s access to funding.



Downside risks to growth are both immediate and longer term, relating to heightened uncertainty about the economic impact of the coronavirus pandemic and to the possibility that negative economic sentiment becomes further entrenched as policymakers and stakeholders continue to struggle to reach consensus on the structural reforms that would sustainably stimulate growth and employment. With unemployment at already very high levels (29%), even weaker growth would have significantly negative social implications.



Should these downside risks materialise, South Africa&#8217;s government debt would stabilise later and at a higher level than currently expected by Moody&#8217;s. A steeper increase in debt would weaken debt affordability, potentially challenging the government&#8217;s currently strong access to funding at manageable costs, particularly during periods of acute risk aversion by global investors such as at present. Although South Africa&#8217;s exposure to global financing conditions is mitigated by its reliance on local currency debt, its weak economic and fiscal fundamentals could exacerbate adverse capital flows.



ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS



Environmental risk influences Moody&#8217;s assessment of South Africa&#8217;s economic resilience. Due to its geographical location, South Africa is subject to frequent climate change-related shocks such as droughts which undermine the agricultural sector&#8217;s performance and weigh on growth. Set against that, the country&#8217;s economic diversification and sophisticated agricultural techniques mitigate the impact of environmental considerations on South Africa&#8217;s credit profile.



Social considerations are material for South Africa&#8217;s credit profile and their implications for the economy and public finances are a driver of the rating downgrade. Deep socio-economic inequalities complicate the implementation of reforms that would otherwise unlock the economy&#8217;s significant potential. They also contribute to tensions and resistance from key stakeholders that ultimately fuel political risk.



Governance considerations are material to South Africa&#8217;s credit profile. South Africa&#8217;s ranking under the Worldwide Governance Indicators is stronger than Ba1-rated sovereigns, and the strength of key institutions, 



in particular the South African Reserve Bank and the Treasury, support the rating. However, the broader erosion in institutional strength induced by the wide-spread corruption of the Zuma administration is an important factor behind the erosion in South Africa&#8217;s credit profile in recent years. Moreover, the legacy that era has bequeathed of poor governance of state-owned enterprisess remains a key drain on fiscal resources.



WHAT COULD CHANGE THE RATING UP



Given the negative outlook a rating upgrade is unlikely
in the near future.



Moody&#8217;s would likely change the rating outlook to stable if the government&#8217;s medium-term fiscal consolidation were to proceed broadly in line with the rating agency&#8217;s central expectations, with prospects of a slow but durable pick-up in growth and financing risks remaining low. In this scenario, Moody&#8217;s would likely see a gradual reduction in South Africa&#8217;s primary deficit in the next few years, with increasing assurance that government debt will stabilize comfortably below 90% of GDP.



WHAT COULD CHANGE THE RATING DOWN



South Africa&#8217;s ratings would likely be downgraded if Moody&#8217;s were to conclude that any combination of very weak growth, failure to reduce the primary deficit, and rising financing costs was likely to cause the debt burden to rise to even higher levels than currently projected with even greater uncertainty regarding its eventual stabilisation, in turn threatening South Africa&#8217;s access to funding at manageable costs. Such an outcome would speak to weaker institutional policymaking capacity and, over time, a diminution of economic and fiscal strength consistent with lower rating levels.



Important indicators in this regard include the government&#8217;s ability over the next year or so to contain the impact of global recession on the South African economy and to promote recovery thereafter; to agree and begin to implement the structural reforms that would strengthen the economy. The implementation of the framework for a reliable supply of power to the economy and fiscal reforms to contain expenditure and enhance revenues are important milestones.

Moody’s downgrades SA to junk

By Lucie Villa, Moody’s Vice President – Senior Credit Officer



On 26 February, the Government of South Africa (Baa3 negative) released its <a href="https://www.cnbcafrica.com/insights/budget-day/2020/02/26/budget2020-sas-finance-minister-tito-mbowenis-full-speech/">budget </a>for fiscal 2020 (year ending 31 March 2021) and for the subsequent two fiscal years. The fiscal trajectory under the new budget is broadly similar to the Medium-Term Budget Policy Statement (MTBPS) presented in October 2019. In the budget, the government has acknowledged that weak economic growth will weigh on revenue intake, which the government has attempted to compensate for by containing spending, particularly on the public sector wage bill. However, it avoided introducing any broad tax-increasing measures given the weak growth environment. As a result, fiscal deficits will remain wide, around 6%-7% of GDP in the next few years, which will increase the government&#8217;s debt burden over the budget period. Moreover, uncertainty regarding the success of negotiations with the country&#8217;s unions to reduce the wage bill and potential contingent liabilities from state-owned enterprises (SOEs) mean risks to budget forecasts are elevated. For fiscal year 2020 (the year ending March 2021), the main budget1 balance – the relevant fiscal metric to infer developments in government debt – is unchanged from the MTBPS at 6.8% of GDP. For the overall budget – which is broader – the government plans an overall deficit of 6.8% of GDP, which is higher than the 6.5% presented in the MTBPS. The revision stems from the social security funds balance, which is now recording a deficit equivalent to 0.2% of GDP, from a surplus of 0.1% in the MTBPS, because of legislative changes to the Unemployment Insurance Fund. This deficit will not weigh on the government&#8217;s borrowing needs because it will not be financed with debt.



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The government has reduced its revenue forecasts to 29.2% of GDP in fiscal year 2020 from 29.3% in the MTBPS and estimates of 29.4% in fiscal year 2019. Expected gains from the carbon tax will offset the revenue loss from above-inflation increase in personal income tax brackets. The government has focused on adjustments to primary spending to compensate for this drop in revenue. Its focus will be the public sector wage bill, where it expects to realize savings of R36 billion (0.7% of GDP) compared with the MTBPS in fiscal year 2020. This would more than offset increases in support to SOEs compared with the MTBPS, especially support to South African Airways. 



However, interest expenses will consume an increasing share of revenue at a projected 14.5% in fiscal year 2020, up from 13.5% in fiscal year 2019. Total spending as a proportion of GDP is higher than in the MTBPS (36.0% vs. 35.8% of GDP) and higher than in fiscal year 2019 because of the slower than previously expected nominal growth and higher interest spending. In subsequent years, the government projects stable revenue, at 29.2% of GDP, which we view as achievable. The budget details further the South Africa Revenue Service&#8217;s efforts to improve tax compliance but does not quantify the expected impact of such efforts. Fiscal adjustments will predominantly come from the continued moderation in the wage bill growth, at a Compound Annual Growth Rate of 3.5%, compared with annual inflation of around 4.5% and average nominal GDP growth of 5.9% over the period. The authorities have yet to negotiate any moderation in wages with the country&#8217;s unions, which will likely be challenging given South Africa’s socioeconomic realities and would represent a significant departure from the outcome of previous negotiations. If the government fails to contain the rise in the wage bill and compensation spending increases in line with the MTBPS, we estimate that the fiscal deficit would reach 7.5% of GDP in fiscal year 2020 and 7.1% in fiscal year 2021. The SOE sector, which has been a main source of unexpected spending in recent years, increases the risk of a wider-than-expected deficit. Even if the government achieves its planned spending restraint, the government&#8217;s projected primary deficit of 1.1% of GDP by fiscal 2022 would still be too wide to stabilize the debt burden given weak growth projections and our expectation of a further rise in the interest bill. The budget projects government debt will reach 71.6% of GDP by end of March 2023 (net of the guarantee to SOE debt that we have included in government debt since fiscal 2019), 10 percentage points higher than the level estimated for end March 2020. Risks remain skewed toward a higher debt path given the challenges in containing spending growth and persistent risks to growth.

Moody’s rates SA’s #Budget2020, warns risks remain skewed toward a higher debt path

By Derek Cikes, Commercial Director at Payflex



South Africans are desperate for innovative payment solutions that don’t involve credit traps. In response to a soaring debt crisis due to the miseducation of credit and lending terms and conditions &#8211; both on credit cards and store cards &#8211; philanthropic South Africans in their hundreds have been paying off other people’s store lay-bye debt, according to <a href="https://www.businessinsider.co.za/pep-lay-bye-2020-1">businessinsider</a>. 



It begs the question though, what is available for online
shoppers and is there a way to avoid credit in all its disguises entirely? The
answer is yes and they’re called ‘Buy-Now Pay-Later’&nbsp; solutions (BNPL)
that offer interest-free, zero-fee shopping with no catches, are going to war
with SA’s debt problem on behalf of online consumers.



“There is a way that shoppers can avoid debt all together,
shop responsibly and get ownership of their goods immediately,” explains <a href="https://www.payflex.co.za">Payflex</a>
CEO, Paul Behrmann. Payflex is leading the charge in disrupting the way
shoppers buy online. The company, based in Illovo Johannesburg, already has
thousands of South African customers and over 100 stores signed up for Payflex.




The problem with store Lay-byes is that you never really own
the goods until you’ve paid in full. Online solutions such as Payflex, allow
you to own the goods immediately while they pay the merchant directly and take
on all the risk. 



“This is a solution where everyone wins. The merchant can
boost their sales by 20 to 30% through larger baskets and improved conversion
while the buyer gets to own their goods right away while shopping responsibly
and avoiding any debt whatsoever,” explains Behrmann.



In other countries, millions of people are already using
BNPL solutions like these such as <a href="http://klarna.com">Klarna</a>, <a href="https://www.afterpay.com/">Afterpay </a>(global giant in this industry) and <a href="https://zip.co/nz/">Zip Payments</a>.
Behrmann believes it’s not a question of if but when South Africans will
turn their backs on destructive interest rates and choose more responsible
solutions instead.



Payflex is available on leading online stores across South Africa including South Africa’s largest fashion online retailer, Superbalist.com



Content provided by Talking Point Communications

Fintech innovations offer alternative to credit traps

NAIROBI (Reuters) &#8211; Kenya is in advanced talks with the World Bank for “a fairly priced” loan of up to 100 billion shillings ($991.57 million), nearly half of its required external funding this fiscal year, a senior Treasury official said on Friday.



The East African nation wants to cut debt from overseas capital markets, after a borrowing binge in recent years, including Eurobond offerings, a package of Chinese loans and syndicated commercial loans.



The World Bank, which has multiple development funding programs with Kenya worth billions of dollars, is seen as one of the viable alternatives to commercial debt.



The Washington D.C.-based financier lent money straight to the Kenyan ministry of finance for the first time last year, changing past practice where it channelled cash straight to the projects, bypassing the Treasury.



The size of the loan from the World Bank will be determined by how much its own funders can put together, said Julius Muia, the principal secretary in the ministry of finance.



“We are thinking something between 50-100 billion (shillings) depending on what kind of interest there will be,” he told Reuters.



The loan will be cheaper than commercial debt, the official said, in line with the government’s policy of cutting its funding costs.



“It is very competitive, it is fairly priced,” Muia said, adding it was likely to be just above the bank’s concessional rate of 200 basis points in interest.



Kenya became a middle-income country in 2014 after it rebased the economy, meaning it cannot secure funds from the World Bank at the concessional rates offered to low-income states.



The finance ministry has set a budget deficit of 6.3% of GDP for this financial year to the end of June and Muia said about 213 billion shillings is expected from external sources.



The balance of the funds will be raised through Kenya’s first sovereign green bond, he said, with the country taking advantage of next week’s UK-Africa investment summit in London to gauge investor demand for the potential issue.



“It is taking shape as we go,” Muia said.



The Treasury projects that the budget deficit will shrink to 5.7% of GDP in 2020/21. The gap, which peaked at 9.1% of GDP in 2016/17 financial year, is expected to narrow further to the desired level of 3.3% in 2023/24.



Muia said he was confident that this year’s deficit will be fully covered through affordable loans.



“We are very clear in our minds that we want to keep the cost of debt down.”



($1 = 100.8500 Kenyan shillings)



Editing by Muralikumar Anantharaman &amp; Shri Navaratnam

Kenya is in talks with World Bank for $1 billion loan

By Emma Rumney



JOHANNESBURG, Jan 7 (Reuters) &#8211; Russian bank VTB is suing a Mozambique state-owned company over $535 million it extended as part a series of loans now at the centre of a $2 billion debt scandal.



An online court filing dated Dec. 23 shows VTB has lodged a lawsuit in Britain&#8217;s High court against the Mozambique state and Mozambique Asset Management, which borrowed the money from VTB as part of a costly project that U.S. authorities say was an elaborate front for a bribery and kickback scheme.



VTB had been in talks with the southeast African country over restructuring the loan, which the deputy head of VTB Capital&#8217;s legal department said in October represented a &#8220;significant exposure&#8221; for the bank.



&#8220;An agreed restructuring remains our preferred outcome but after 3 years of discussions with no tangible progress VTB must now consider all options available to it for a resolution,&#8221; VTB said in an emailed statement.



Mozambique&#8217;s Attorney General&#8217;s Office said it was waiting for formal notification of the lawsuit.



The court filing said the case relates to &#8220;general commercial contracts and arrangements&#8221; but no further information was available, other than that VTB Capital, the investment banking arm of VTB, is being represented by law firm Freshfields Bruckhaus Deringer.



The debt scandal has already sparked a series of court cases spanning London, New York and South Africa, ensnaring global investment bank Credit Suisse, three of its former bankers, Mozambique&#8217;s former finance minister and a past president&#8217;s son.



However this is the first time any of the cases have involved VTB, which is more than 60% owned by the state. It comes despite an increasingly close relationship between Russia and Mozambique, with President Filipe Nyusi visiting Russia twice last year and a series of agreements between Maputo and Moscow.



Credit Suisse and VTB provided or arranged a total of around $2 billion for the project, encompassing tuna fishing, maritime security and shipyard development. Hundreds of millions of dollars went missing, while the benefits never materialised.



Mozambique did not disclose some of the loans, which were guaranteed by the state. The International Monetary Fund and other donors cut off support when they came to light in 2016, triggering a currency collapse and sovereign debt default.



It remains on the hook for the money, the largest chunk of which now sits in a restructured eurobond. The country is trying to challenge the guarantee related to a $622 million loan from Credit Suisse, also in a London court.



The Jubilee Debt Campaign, which calls for the cancellation of unjust or unpayable debts of the poorest countries, said Mozambique should not have to pay a cent towards the loans, which were guaranteed without the approval of Mozambique&#8217;s parliament.



&#8220;The loan guarantee was in clear breach of Mozambican law, and the lenders, companies and politicians involved should all be held to account for their role in the deal,&#8221; Sarah-Jane Clifton, the campaign&#8217;s director, said.



(Additional reporting by Tatiana Voronova in Moscow; Editing by Lisa Shumaker, Kirsten Donovan)

This African country is being sued by Russia’s VTB over loan in $2 billion debt scandal

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An International Monetary Fund (IMF) team on a technical assistance mission recently met with Nigeria&#8217;s Debt Management Office to discuss Nigeria&#8217;s Medium Term Debt Management Strategy. Meanwhile, Nigeria is aiming to earn at least 80 per cent of revenues from non-oil sources in the next three years. Egie Akpata, Director of Union Capital Markets joins me to discuss these stories and more.

DMO: $22.7bn borrowing request consistent with debt strategy

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Senegal’s Minister for Economy, Planning and International Corporation, Amadou Hott, says when African countries borrow, they have to make sure the debt is mostly used for acquiring assets that generate both social and economic returns. CNBC Africa&#8217;s Kenneth Igbomor caught up with him on the sidelines of IMF&#8217;s International Conference in Senegal which focused on sustainable development and debt sustainability.

Sustainable Development

Sustainable Development, Sustainable Debt: Debt must acquire assets that generate social & economic returns – Amadou Hott

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Deputy Secretary-General of United Nations (UN), Amina Mohammed says the context, quality and the use of debt matters. She discussed Africa&#8217;s progress on Sustainable Development Goals (SDGs) with CNBC Africa&#8217;s Kenneth Igbomor on the sidelines of IMF&#8217;s International Conference in Senegal which focused on sustainable development and debt sustainability.

Sustainable Development, Sustainable Debt: The context, quality and the use of debt matters, says UN’s Amina Mohammed

MAPUTO (Reuters) &#8211; Mozambique will continue to negotiate debt restructuring with creditors, despite a court ruling that a government-guaranteed $850 million Eurobond issued by the state fishing company Ematum SA in 2013 was illegal, the finance minister said on Wednesday.



Finance Minister Adriano Maleiane told a business conference in Maputo that the debt restructuring talks were not in violation of the June ruling by Mozambique’s top court.



The $850 million Eurobond was dubbed the “tuna bond” as it was supposed to finance a tuna fishing fleet and had been presented to investors as funding for fishing infrastructure, although much of the cash was later designated for maritime security and reallocated to the defence budget.



In 2016, Mozambican officials agreed to swap the tuna bond’s outstanding $697 million for a sovereign Eurobond.



“The government respects the deliberations of our institutions,” Maleiane said. “The decision of the Constitutional Council is a decision that cannot be overturned. It has to be respected and we are respecting it.”



Maleiane said that the restructuring was meant to only repay lenders who acted in good faith.



“The government cannot tell bona fide creditors that ‘I will not pay back.’ I can’t tell the creditors that I am awaiting the payment of the money taken by those who contracted the loans,” Maleiane said.



“The Attorney General Office has the task of pursuing the $850 million on those who acted in bad faith,” he added.



On Monday the government said creditors holding 99.5% of Mozambique’s $726.5 million Eurobond support its debt restructuring proposal, paving the way for an overhaul of part of its heavy debt burden.



Reporting by Manuel Mucari; Editing by Lisa Shumaker

This African country will continue debt restructuring talks despite ‘tuna bond’ court ruling

By <a href="https://theconversation.com/profiles/oludara-akanmidu-495255">Oludara Akanmidu</a>, <a href="http://theconversation.com/institutions/de-montfort-university-1254">De Montfort University</a>

Nigeria has received a legal hiding after a UK court awarded a private company a US$9.6 billion <a href="https://www.grantthornton.co.uk/insights/quantum-matters--record-usd6.6bn-award-against-nigeria/">judgment debt</a> against the West African nation. The ruling has generated significant attention in both domestic and international media. This is understandable given that the sum amounts to 20% of the country’s foreign <a href="https://thenationonlineng.net/9-6bn-judgment-fraudulent-target-on-our-foreign-reserve-fg/">reserves</a>. This means it poses a significant threat to its economy. 

The big question is: What went wrong? How did Nigeria end up in this costly situation? For the answer, we must look back to January 2010 and a gas supply contract that went horribly wrong.

<h2>The Background Story</h2>

On 11 January 2010 Process and Industrial Development (P&amp;ID), a company based in the British Virgin Islands, signed a contract with the Federal Government of Nigeria. This contract is called a gas supply and processing agreement. Nigeria’s government agreed that, over a 20-year period, it would supply natural gas (wet gas) to P&amp;ID’s production facility. 

In return, P&amp;ID would process the wet gas by removing natural gas liquids and return approximately 85% of it to the government in the form of lean gas. This lean gas was to be returned at no cost to the Nigerian government. 

Based on this agreement, Nigeria was supposed to arrange for the supply of wet gas to P&amp;ID’s gas processing facility which it intended to build in the country’s Cross Rivers State. This required the government to construct pipelines and arrange facilities for transporting the wet gas. The government failed to do this for three years. 

P&amp;ID viewed this failure as a repudiation of the contract. In simpler terms, this means that the government renounced their obligation under the contract. Consequently, in March 2013, P&amp;ID began an <a href="https://www.grantthornton.co.uk/insights/quantum-matters--record-usd6.6bn-award-against-nigeria/">arbitration</a> action against the government before a London tribunal.

Clause 20 of the agreement, which both parties signed, provided that any disputes were to be resolved by arbitration with the seat of arbitration being London, England or any other place agreed by the parties. Nigeria tried to contest this, but its appeal to have the tribunal sit in Nigeria failed.

At the tribunal, P&amp;ID <a href="https://pacer-documents.s3.amazonaws.com/36/194469/04516479471.pdf">claimed</a> that it had invested $40 million in the project even though it had not acquired the land or built any facilities for gas processing. It claimed damages of about US$6.6 billion dollars: the amount of the net income it would have earned over the 20-year period of the agreement. 

In response, the government argued that the damages claimed were not a fair and reasonable consequence of the government’s breach of the agreement. This is because P&amp;ID never commenced building the gas processing facility. It also argued that P&amp;ID should be awarded only three years’ worth of income as by that time, the company should have found some other profitable investment which would reduce its losses from the breach. 

Similarly, the government objected to the measure of estimated expenses and income stream which P&amp;ID used to calculate its damages claim. 

<h2>The tribunal’s decision</h2>

In July 2015 the tribunal decided that by failing to fulfil its obligations, the government had repudiated the agreement. P&amp;ID was therefore entitled to damages. 

In January 2017, the tribunal by a majority of 2 to 1 made a final award of US$6.597 billion together with interest at the rate of 7% starting from 20 March 2013 until payment is made. The 7% <a href="https://pacer-documents.s3.amazonaws.com/36/194469/04516479471.pdf">interest</a> reflects what P&amp;ID would have paid to borrow the money or earned by investing the money in Nigeria. 

Following the tribunal’s award of damages, in March 2018, P&amp;ID brought an action before the Queen’s Bench Division of the English Commercial Court. It wanted permission to enforce the damages awarded by the tribunal. Despite delays by the Nigerian government, on 16 August 2019, the court made an order enforcing the tribunal’s final award which now stands at about $9.6 billion. 

In making this award, the court noted that the damages awarded were purely compensatory and not intended to punish the Nigerian government. The court also confirmed that there were no public policy grounds on which the award should not be enforced. This decision converts the arbitration award to a legal judgement. 

This case perhaps highlights issues with Nigeria’s ability to effectively manage its oil and gas resources as well as its facilities. Between January and June 2019 alone, it is reported that Nigeria <a href="https://guardian.ng/news/why-crude-oil-losses-persist-despite-huge-surveillance-contracts/">lost</a> 22 million barrels of crude oil.

These losses have been largely attributed to pipeline vandalism and aged pipelines. The Nigerian National Petroleum Corporation recently spent billions on oil pipelines maintenance. But other problems, such as <a href="http://saharareporters.com/2018/11/20/exclusive-protests-nnpc-awards-1848m-contract-without-following-due-process">corruption</a> and fraud in awarding security surveillance contracts for pipelines, persist.

<h2>Next steps</h2>

The $9.6 billion appears to be the largest amount of damages awarded against Nigeria to date. Evidence however suggests this is not the first time that Nigeria has failed to meet its contractual obligations. In 2016 it was reported that investors in Nigeria’s power sector <a href="https://qz.com/africa/591036/investors-are-threatening-to-pull-out-of-nigerias-fragile-privatized-power-sector/">threatened</a> to pull out due to the government’s failure to meet its contractual obligations.

This case also demonstrates an ongoing issue with the government’s attitude to critical infrastructural projects. The <a href="https://www.researchgate.net/publication/309943763_Politics_of_Hydroelectric_Power_Development_in_Nigeria_A_Case_Study_of_the_Mambilla_Hydroelectric_Power_Project">Mambilla</a> hydroelectric power project is a case in point. In spite of the huge potential offered by the project, it has been plagued by several controversies ranging from corruption and embezzlement of funds to the “irregular” awarding of contracts, and a general lack of political will. 

The Nigerian government is yet to pay the judgement debt. <a href="https://www.vanguardngr.com/2019/08/fg-alleges-conspiracy-in-9-6bn-judgment-debt/">Allegations</a> of domestic and international conspiracy surrounding the agreement continue to abound. For now, the government has said that it intends to appeal the amount awarded.<img loading="lazy" decoding="async" src="https://counter.theconversation.com/content/122740/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important" />

<a href="https://theconversation.com/profiles/oludara-akanmidu-495255">Oludara Akanmidu</a>, Lecturer in Law, <a href="http://theconversation.com/institutions/de-montfort-university-1254">De Montfort University</a>

This article is republished from <a href="http://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/explainer-how-nigeria-got-hit-with-a-9-6-billion-judgment-debt-in-london-122740">original article</a>.

Explainer: A UK court hit Nigeria with a $9.6 billion judgment debt, how did the West African country end up in this costly situation?

NAIROBI (Reuters) &#8211; Kenya’s headroom for new borrowing has shrunk since it tapped the Eurobond market this month and it is time for the country to begin reorganising its debt, central bank governor Patrick Njoroge said on Tuesday.



Njoroge, whose term is due to end next month, told reporters that the $2.1 billion Eurobond issuance in mid-May allowed Kenya to refinance some of its existing loans and “hopefully (give) us more room to expand the economy” and increase export capacity.



Kenya’s public debt as a percentage of gross domestic product (GDP) has increased to 55% from 42% when President Uhuru Kenyatta took office in 2013. The East African government has defended the increased borrowing, saying the country must invest in its infrastructure, including roads and railways.



Critics of the borrowing spree have questioned the value of some of the projects, particularly the billion China-backed railway project completed in 2017.



“As advisers of the government, our point is this is the time to begin working on reorganising our debt, not in a frantic way, so doing it the Eliud Kipchoge way, which is (that) it’s a marathon (run) and you have to do it in a steady way.”



The latest Eurobond was issued in tranches of seven and 12-year paper. The seven-year portion of the latest issue was priced at 7.0%, while the longer-dated tranche was priced at 8.0%.



“It is important to say that the moment for dealing with debt reorganisation, looking at debt and itself reorganizing it,&#8230;that moment has come,” Njoroge said. He did not spell out how the debt could be restructured.



Kenya is also negotiating with the World Bank for a $750 million loan for budgetary support, documents on the lender’s website showed on Tuesday.



Njoroge declined to comment on whether his tenure will be extended for a second and final four-year term.



The Kenyan economy expanded by 6.3% in 2018 as good rains boosted the agriculture sector. But a delayed start to Kenya’s rainy season this year could shave as much as 0.4% off forecasted growth, he said.



“We are not talking drought like we had in 2017,” Njoroge said, “because the rains have arrived, and the question now is are they adequate?”



The bank has forecast the same growth rate for this year, but the first rains, which usually start in March, did not come until late April.



First-quarter growth data, usually released in June, would make the outlook for this year clearer, he said.



The central bank held its benchmark lending rate at 9.0% on Monday, saying it would keep an eye on recent food and fuel price rises that could fuel inflation.



The U.S.-China trade dispute had escalated to a “full-scale war”, Njoroge added, and posed risks to the Kenyan economy. Uncertainty over Britain’s planned exit from the European Union is another external risk, he said.



Reporting by Omar Mohamed; Writing by Duncan Miriri; Editing by Maggie Fick and Mark Heinrich

Room for Kenya to borrow has shrunk, it needs to fix this – Central bank chief discusses

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Lourens Campher from Investec for Business joins CNBC Africa to talk about cost effective company financing.

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OPINION: Post COVID-19-Rebuilding Africa and strengthening it against future economic shocks.

South Africa unlikely to sort out its debt in four years – Fitch.

Op Ed: East African finance ministers to present budgets for new fiscal year

Our top share picks for the brave investor: Finding opportunities in times of adversity

Moody’s places Angola’s B3 ratings on review for downgrade

Moody’s downgrades SA to junk

Moody’s rates SA’s #Budget2020, warns risks remain skewed toward a higher debt path

Fintech innovations offer alternative to credit traps

Kenya is in talks with World Bank for $1 billion loan

This African country is being sued by Russia’s VTB over loan in $2 billion debt scandal

DMO: $22.7bn borrowing request consistent with debt strategy

Sustainable Development, Sustainable Debt: Debt must acquire assets that generate social & economic returns – Amadou Hott

Sustainable Development, Sustainable Debt: The context, quality and the use of debt matters, says UN’s Amina Mohammed

This African country will continue debt restructuring talks despite ‘tuna bond’ court ruling

Explainer: A UK court hit Nigeria with a $9.6 billion judgment debt, how did the West African country end up in this costly situation?

Room for Kenya to borrow has shrunk, it needs to fix this – Central bank chief discusses

When is the right time for a company to take on debt?

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