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May 15 (Reuters) – (The following statement was released by the rating agency)
In its latest Sub-Saharan Africa (SSA) Credit Overview, Fitch Ratings says it expects growth in SSA to remain robust in 2014, rising to 5.4% from 5.1% in 2013, despite slower growth in China and other emerging markets. Growth is increasingly coming from domestic sources; government financed infrastructure spending and emergent consumers. Weaker currencies, among other factors, will cause inflation to increase slightly in 2014.
Home grown challenges have become more prominent, highlighted by the impact of Fed tapering on bond and currency markets. The hardest-hit countries (Ghana, Zambia and South Africa) have seen their currencies fall by 32%, 19% and 13%, respectively, since May 2014, while in Nigeria reserves have declined by USD5.6bn to USD37.9bn since the start of the year. In contrast, countries with fewer near-term domestic challenges, for example Rwanda, Uganda, Kenya, Mozambique and newly-rated Ethiopia, have proven most resilient.
Two consecutive years of double digit budget deficits and a sharp depreciation of the currency have pushed Ghana’s public debt to 61.8% of GDP, up from 38.3% in 2011, driving short-term domestic funding costs in excess of 23% – the highest level in three years. The cost of funding in the international capital market has also risen and may prove to be prohibitive, raising further concerns about how the large budget and current account deficits will be funded in 2014.
In contrast, recent fiscal data for Zambia presents a more favourable picture compared with last year’s fiscal deficit of 6.8% of GDP, with first quarter data suggesting expenditure remained on track and VAT receipts beat expectations. This kept the deficit contained to 1% of GDP. Currency weakness could largely be attributed to deficits on both the current and capital account, which the recent Eurobond issue should help to bridge.
Notwithstanding the adverse impact on the currency and inflation, the fallout to date from Fed tapering has been modest in South Africa. From a credit perspective, the greater challenge for the country after the elections will be putting in place policies that support stronger growth, faster job creation and a narrowing of the fiscal and current account deficits, which continue to place upwards pressure on public and external debt ratios. Without them South Africa’s creditworthiness will remain on a gradual path of deterioration.
External financial pressure on Nigeria has abated since April with the naira recovering most of the losses seen in February, when central bank governor Sanusi was suspended, and reserves rising slightly. However, the news remains mixed, with robust growth and falling inflation, supported by strong fiscal and monetary policies, overshadowed by pre-election political wrangling and the growing prominence of Boko Haram, a militant Islamist group.
Fitch expects SSA to continue benefiting from rising foreign direct investment, particularly in emergent oil and gas producers like Mozambique, Kenya and Uganda. Public infrastructure spending will continue to drive growth in Ethiopia, Angola as well as Mozambique, as governments gain access to new sources of funding and on improved implementation capacity. Rising public sector wages in a number of countries, combined with improving access to credit, will support private sector consumption.