Evergrande default leaves Egypt, Ghana as most-exposed African borrowers: Rencap

By David Whitehouse
Posted on Thursday, 23 December 2021 11:06

REUTERS/Tyrone Siu

Stresses in the Chinese property sector culminating in the default of the country’s largest real-estate developer Evergrande cloud the outlook for African sovereign debt in 2022, Renaissance Capital’s global chief economist Charles Robertson told a briefing on 16 December.

The Evergrande debacle has dampened commodity prices, which in turn is hurting the attractiveness of African eurobonds, Robertson said. He sees China’s property woes as a problem for emerging markets rather than the global financial system. “Evergrande is the biggest threat to emerging markets in 2022.”

Robertson’s base-case scenario is that Chinese policymakers have got it right, but there is little margin for error, and African economies will be on the front line if that proves inaccurate. Rencap has crunched the numbers for the last 60 years and found that falling GDP is a better predictor of political instability than rising inflation in low-income countries. African GDP levels will take a hit if China pans out worse than expected in 2022, Robertson said. “That’s my biggest concern for 2022.”

  • Egypt and Ghana have both seen eurobond price weakness in recent months, and the two are the African countries with the highest interest burdens relative to state revenues and GDP. Only Sri Lanka has worse metrics globally, Robertson said.
  • Ethiopia, Kenya, Namibia, Mauritius and Rwanda also face the risk of credit downgrades over the next six months, he added.
  • Kenya’s ratio of external debt to exports has tripled from less than 171% in 2000 to 598% in 2019. This “does not look like a sustainable trend” unless exports improve, research from Rencap says.

Small Country Problem

Rencap is positive on some individual Egyptian stocks, with “buy” ratings on fintech Fawry, healthcare company Integrated Diagnostics Holdings, Orascom Construction and educational-services provider Cairo for Investment and Real Estate Development (CIRA).

Even so, Egyptian equities as a whole will continue to suffer from the “small country” problem caused by the trend for global active equity managers to have more concentrated portfolios containing only their main investment ideas, Rencap’s head of research Daniel Salter told the briefing.

This arises from the need for active managers to distinguish themselves from passive index-tracking funds, Salter said. Having a diversified portfolio leaves active managers open to the charge of being “closet trackers” who charge active management fees while producing close to index returns. In emerging markets globally,

  • Egypt is one of the countries that is suffering the most as active emerging-markets managers whittle down their number of holdings, Salter said.

South Africa

Rencap’s research argues that South Africa’s metals-heavy export mix is “more vulnerable to slower Chinese property and infrastructure investment than its oil exporting peers”. To date, reforms under President Cyril Ramaphosa are insufficient to break the vicious circle of low growth and high unemployment, it says.

South Africa, Robertson said, “has had its best year in 2021” with a strong current-account surplus for most of the year, which has begun to fade in the last two months. There remain “background concerns” over South African debt levels, Robertson said. Rencap “hasn’t seen much interest in South Africa in recent months.”

Still, progress on energy reform and decarbonisation are positives, the firm’s research says. Debt metrics look healthier after a GDP restatement and strong tax revenues. There should be a “much lower peak” for the government debt to GDP ratio than feared a couple of years ago.

  • Rencap rates Naspers stock a “buy”, but is underweight on South Africa and is cautious on the mining sector due to Chinese exposure.
  • Other favoured African equities are Guaranty Trust Holding in Nigeria and Canadian oil and gas company Africa Oil.

Bottom Line

African governments, which have borrowed heavily are leaving their ability to borrow hostage to China’s ability to manage its real-estate turbulence.

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