Why the Republic of Congo and Nigeria worry international agencies

In quick succession, Moody’s and Standard & Poor’s (S&P) have issued two particularly bitter verdicts regarding the debt outlooks of two of Africa’s leading oil producers. In its analysis dated 27 January, S&P maintained the “CCC+” rating that it had assigned to Congo-Brazzaville in early September 2020.

The agency feels that the Congolese government still faces “substantial risks” of default on its debt. The quality of its sovereign signature, therefore, remains barely two notches above the “CCC-” category, indicating a situation of “default with little prospect of recovery”. This verdict remains unchanged despite rising economic growth and an improvement in the country’s fiscal situation.

Economic recovery

S&P made sure to point out that the economic recovery, once unexpected, is finally here. After eight years of almost continuous recession, between 2014 and 2021, GDP grew by 2.6% in real terms last year and is expected, according to the agency, to reach “3.3% on average over the period 2023-2026”. The budget deficit, which had reached -0.7% of GDP in 2020, gave way to a surplus of 5.6% in 2022. It is expected to be around 4.4% this year.

These results are largely due to the rise in oil prices, which increased from $99 (€91) per barrel on average last year, compared to $42 in 2020, according to S&P. The latter evaluates the oil sector’s contribution, which makes up 60% of the state’s income and 80% of the country’s exports.

The international agency sees this rise as the source of future debt instability in the country. In particular, it anticipates a drop in crude oil prices ($90 per barrel of Brent on average this year and $80 in 2024), which, combined with rising spending and inflation, could “erode surpluses” in the budget, expected to fall to 3.6% of GDP next year and 0.4% of GDP in 2026.

Delayed negotiations

Meanwhile, and despite successful renegotiations of its debt with oil traders, the executive faces debt repayments estimated to average 7% of GDP over the 2023-2026 period, half of which are to foreign creditors.

This is expected to result in “a significant financing gap” and makes it all the more crucial that Brazzaville secures the loans it hopes to obtain in 2023 “from the IMF, the World Bank and the African Development Bank”, says S&P.

Brazzaville is behind schedule on finishing the second review of the progress of reforms, which is provided for in the three-year $455m financing agreement concluded in January 2022 with the IMF.

Brazzaville had failed to meet three of the five criteria set by the Fund, including reducing the non-oil budget deficit and reducing state-granted domestic financing. Granting a subsidy to the Société Nationale des Pétroles du Congo (SNPC) to import petrol remains a stumbling block. Both parties announced in December that they hoped to complete the review quickly this year so that they could release the second tranche of funding. S&P’s pressure tactic underlines the urgency that there be a rapid conclusion to these discussions. 

Vicious circle

To a large extent – albeit on a different scale – the issue of accessing external financing also played a role in Moody’s decision to downgrade Nigeria’s sovereign rating. The latter was downgraded from “B3” to “Caa1”, the equivalent of Congo-Brazzaville’s rating, on 27 January.

While the federal republic’s public deficit and debt remain low (respectively -6% and 34% of GDP in 2021), the agency anticipates that there will be a negative mutually reinforcing effect, a sort of vicious circle, between “rising public financing needs and higher interest rates”.

In particular, Moody’s forecasts that interest payments on public debt could absorb “about half of revenues in the medium term, up from an estimated 35% in 2022”. Similarly, the debt-to-GDP ratio of the continent’s largest economy could “continue to rise to almost 45%, up from 34% in 2022 and 19% in 2019”, says the agency.

The local financial market’s capacity to continue to feed the government machine remains limited, it points out. It is also already concerned that 42% of local banks’ balance sheets are made up of government debt and central bank-related claims.

“In the medium term, [the country’s] external liquidity profile is likely to erode unless the government manages to improve its access to external sources of borrowing. This, in turn, will depend on the government’s ability to demonstrate that it is capable of carrying out its fiscal reforms,” says the agency, expressing scepticism.

Moody’s says it is entirely possible that the leadership that emerges from the elections scheduled for late February 2023 will have “sufficient political capital to address the country’s fiscal challenges“. However, it believes that “weak institutional capacity and [strong] vested interests suggest that implementation will take time”. To make matters worse, “Nigeria’s complex social context and societal structure make it even more difficult to implement tax reforms,” says the international agency.