Africa: Shift in debt structure increases sovereigns’ vulnerability - Moody’s


Although the debt burdens of most Sub-Saharan Africa (SSA) governments will stabilise in 2020-21 after years of increase, several sovereigns are now increasingly vulnerable to a financing shock, Moody's Investors Service said in a report on Tuesday.

According to the rating agency, credit risks are highest in countries where unfavourable debt structures coincide with narrow external buffers, financing constraints on domestic banking sectors and weak debt-management capacity.

The Republic of the Congo, Mozambique and Zambia are most exposed, while Ghana, Angola and Kenya are also vulnerable but to a lesser extent.

"Sub-Saharan African sovereigns' debt has increased and affordability has deteriorated, with government debt now exceeding 50% of GDP in more than half of the sovereigns we rate in the region," said Daniela Re Fraschini, a Moody's AVP-Analyst and the report's co-author.

 “At the same time, a shift in creditor bases has increased credit risks in several countries,” he added in a statement issued in Nairobi.

With countries having greater access to capital markets, issuance on domestic and international capital markets has increased and the share of borrowing from multilateral lenders has fallen, Moody’s pointed out.

Although this has diversified funding sources, fostered investor scrutiny on macro-fiscal policy and provided funding for development spending, it has also increased exposure to global financing conditions, amplified foreign-currency exposures and increased refinancing risk.

At the same time, in some countries bilateral lending has shifted toward non-traditional creditors that usually offer less transparent and predictable terms.

According to the report, the domestic banking sector remains the main holder of domestic bonds and a significant portion of total government debt and its absorption capacities may be limited, especially when the sector is small relative to the sovereign's financing needs.

Improvements in debt management have not been commensurate to the risks from higher debt levels and debt structures more exposed to financing shocks, noted Moody’s.


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