A rise in commodity prices have given a recent leg up to countries in sub-Saharan Africa. In order to make use of this rise, countries such as Nigeria, Kenya and others have either already approached domestic and international investors with bonds or intend to do so.
The state of the economy, its prospects, and the government’s ability to repay the bonds are crucial aspects for present and potential investors.
In the previous article, we looked at growth drivers and individual prospects of some sub-Saharan Africa countries. Let’s now look at major deficit indicators.
Current account balance
Given the rise in crude oil prices, the current account balances of oil exporters like Nigeria are expected to improve drastically, as shown in the graph above provided by the World Bank in the April edition of its ‘Africa’s Pulse’ report. Though rising metals prices should have the same impact on the current account deficits of metals and mineral exporters, the Bank expects that to be offset by rising investment-related imports.
Cross-border capital flows are also expected to improve the deficit situation. The World Bank provides the example of Nigeria, which has seen increased foreign direct investment and was able to approach international bond investors twice this year already.
South Africa and Ghana are the only countries from sub-Saharan Africa whose sovereign bond spreads have widened on worries over fiscal policy and credit rating downgrades respectively. South Africa’s wider spreads are only a recent phenomenon though.
The negative impact of low oil prices can be seen on the fiscal positions of the governments in oil exporting countries. Given the rise in oil prices, the fiscal deficit in these countries is expected to witness a marked improvement this year.
On the other hand, the World Bank also noted the worsening fiscal deficit situation in non-resource-rich countries, and expects deficits to remains broadly unchanged this year.
Impact on attractiveness
These two indicators can have a sizable impact on investor attractiveness, especially in case of a credit rating change. A rating downgrade or increase in fiscal and current account deficits can result into higher borrowing costs for a country seeking to raise money from investors.
Though broadly speaking, the World Bank stated that although “the region’s rating outlook in 2017 remains negative,” investors have still been lapping up sovereign bonds from sub-Saharan Africa because of their brighter economic prospects and infrastructure spending goals. But keeping a tab on the aforementioned indicators is necessary to ensure that the deficit situation does not go out of hand.
Speaking of bright economic prospects, let’s next look at the outlook on the region for 2017.