Ghana, Kenya, Ethiopia on edge as Africa fraught with default risks

In depth
This article is part of the dossier: Africa and the economic storm

By Sherif Tarek

Posted on Thursday, 13 October 2022 09:57
Ghana's President Nana Akufo-Addo
Ghana's President Nana Akufo-Addo in Brest, France February 11, 2022. Ludovic Marin/Pool via REUTERS

The months-long Ukraine war and other global headwinds have left Africa’s largest economies struggling with relentless fiscal pressures and default risks, with soaring yields on the continent barely reversing an exodus of non-resident investors to developed nations.

“The backdrop of aggressive monetary policy tightening by central banks of advanced economies including the Fed (US Federal Reserve) together with growing risk-off sentiment amid concerns about a global recession is certainly unfavourable for African sovereign dollar bonds,” Virág Fórizs, Africa economist at the London-based Capital Economics, tells The Africa Report.

“In much of Sub-Saharan Africa, we expect Eurobond yields to rise further over the coming months. In Ghana and Kenya in particular, mounting investor concerns about balance of payments problems and public debt woes have weighed on sovereign dollar bonds in addition to the unfavourable global backdrop. Default risks are also high in Ethiopia, especially following the latest flare-up in the country’s internal conflict.”

To rein in a rampant inflation, Ghana and Kenya opted to hike interest rates to their highest levels in years, reaching 24.5% and 8.25% respectively. However, the ensuing higher borrowing cost did little to support their debt markets.

In September, Ghana’s 2026 eurobonds declined 2.5% to 59.30 cents on the US dollar, a record low according to Bloomberg, as the yield soared to 27.58%. Meanwhile, Kenya cancelled a KSh115bn ($982m) Eurobond sale last June after yields doubled to 12%.

With the Russian-Ukraine war still ongoing and fuelling inflationary pressures on the US Fed to maintain monetary tightening through the first quarter of 2023, African nations’ financing needs are expected to be increasingly difficult to meet over the next months.

Ghana next in defaulting line?

While drought-stricken Kenya and war-plagued Ethiopia are in the danger zone, Ghana is earmarked to be Africa’s second defaulter after Zambia, which defaulted on its debts in November 2020, says Thea Fourie, Head of Sub-Saharan Africa Insights and Analysis, Economics & Country risk at IHS Markit.

“We’ve seen a lot of bad news coming out of Ghana, we’ve seen large credit agencies downgrading Ghana the past few weeks; Fitch [Ratings] was the latest” after Moody’s and Standard and Poor’s, she tells The Africa Report.

Before recovering from the grave ramifications of the pandemic, Ghana’s fiscal health took a further turn for the worse on the back of the Russia-Ukraine war. The gold-rich nation’s cedi has depreciated around 40% this year, and its total public debt reached 77% of GDP last May.

The external debt of the West African country constituted 40% of GDP as of May, which Fórizs brands a “sizeable” load on its coffers.

Ballooning debts all over Africa

To a lesser extent, international and domestic factors have intensified simmering financial pressures on Nigeria, including its fuel subsidy that is expected to amount to $9.6bn this year, says Fourie, who is based in South Africa’s Centurion.

“This is a country that still has quite sufficient foreign reserve holdings, but things in Nigeria are really unravelling,” she says. “This high subsidy burden that they have for fuel is really putting a lot of strain on the fiscal finances,” not to mention its declining oil output that recently plunged below the 1mn-bpd mark amid recurring vandals and depleted infrastructure, Fourie adds.

Other African nations rated in the ‘CCC’ category, including Congo, Mozambique, and Tunisia, face a “real possibility” of default, says Jan Friederich, head of Middle East and Africa sovereign ratings at Fitch.

“The Republic of Congo, which we recently upgraded to CCC+ as it benefits considerably from the surge in oil prices, still struggles from very high oil dependence and weak debt management,” he tells The Africa Report. “Mozambique, like Congo, has a track record of a recent default.”

Domestic banks may be at risk

With non-resident investors unlikely to make a comeback any time soon, heavily indebted nations in Africa have been ramping up domestic borrowing to fill their financing gaps. Last June, Kenya decided to borrow from local commercial banks after cancelling its Eurobond issuance.

“Banks in Africa can meet the increasing demand from government securities issuance as they are very liquid,” Mahin Dissanayake, senior director and head of African bank ratings at Fitch, tells The Africa Report.

As sovereign debt sustainability risks rise in Africa, there is the increased risk that local currency government securities can be part of a broader sovereign debt restructuring.

“They have large customer deposit bases and annual deposit growth is generally healthy. These customer deposits are low cost and stable and need to be deployed in assets, and typically end up in government securities.

“As a proportion of total assets, African banks’ (excluding South Africa) loan books are relatively small – typically below 50% of total assets. So there is the capacity for banks to hold more government securities.”

However, debt restructuring schemes might prove perilous for African banks that could end up incurring losses on behalf of their governments.

“As sovereign debt sustainability risks rise in Africa, there is the increased risk that local currency government securities can be part of a broader sovereign debt restructuring,” Dissanayake says. “In this worst case scenario, if banks were made to book large losses on their local currency government securities, this increases solvency risks for banks and ultimately lead to their failure.”

Ghana’s precarious banking sector

Seeking to secure a $3bn IMF deal before the end of the current year, Ghana is tipped to embark on debt restructuring, which might have bittersweet results.

“While restructuring domestic debt could lower Ghana’s overall debt service bill, it would hurt the economy,” says Fórizs. “The banking sector holds half of the country’s domestic debt and would be hit by such a restructuring. Their balance sheets would shrink, causing credit conditions to tighten.

“We doubt that policymakers in Ghana would really want to inflict such pain on the economy and, instead, will probably try to push debt haircuts onto external creditors,” adds the Capital Economics analyst.

The fact that Ghana is rated ‘CC’ means its banks hold securities in a low-rated sovereign, which increases their overall risk profile, points out Fitch’s Dissanayake.

“A restructuring of Ghana’s local currency sovereign debt (depending on the materiality of losses booked) could significantly affect the banks’ solvency,” he says. “This will be compounded by heightened market risks and the effect of weak operating conditions on private-sector credit quality.”

Benchmark: Zambia

Last August, the IMF approved a $1.3bn, three-year facility to Zambia, which is poised to restructure its debts soon.

How the Fund’s programme and debt restructuring plays out in the southern African country will indicate the trajectories of Ghana and Kenya, which signed a $2.34bn IMF agreement in April 2021, should they kick off similar schemes, according to IHS Markit’s Fourie.

“You could have a bit of a positive sentiment on the back of those … agreements coming into play,” she says. “I would use Zambia as a benchmark on how this can progress. If you look at what’s been happening in Zambia, the kwacha exchange rate [is] actually doing very well on the back of this IMF support programme and the prospect of debt restructuring.

“But if you look at the 10-year yield, for instance, I have not seen a significant improvement … they’re still reflecting the current weak debt fundamentals. So I think that will probably be the same trajectory for Ghana and Kenya.”

Zambia, whose debt reached 133% of GDP at the end of last year, is pushing for debt relief, saying this month that ​​a present value reduction of  $6.3bn, comprising 49% of its external debt, is required by 2027 to fulfil the IMF targets, according to Reuters.

“Until it’s finalised and there’s a clear roadmap for investors ahead; what the debt trajectory is going to look like post G20 Common Framework for restructuring debt probably you could see debts coming down,” Fourie says.

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