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Africa Update: Debt Service and Liquidity Outlook Amid COVID Resiliency
- By Giancarlo Perasso, Lead Economist, Global Macroeconomic Research Team, and Brian Levine, Associate, Global Macroeconomic Research Team
- November 12, 2020
Africa’s hard currency sovereign debt can be a source of notable alpha generation, with the region outperforming the J.P. Morgan EMBIGD benchmark in two of the last three years.1 Its returns can be volatile as well, even before factoring in the effects of a global pandemic. With these dynamics in mind, the following takes a closer look at the underlying credit fundamentals across the region amidst an uncertain global backdrop.
Africa has weathered the Covid-19 pandemic better than expected. Deaths per million reached 1,740 in October, a fraction of those incurred Europe (14,020), the Americas (12,050) and Asia & Pacific (4,340).2 Contributing factors may include a favourable climate, younger population, and strong community-based health systems.3 While the economic impact of the pandemic has been severe, Africa’s medium-term outlook remains on par with other emerging markets, per the IMF’s latest World Economic Outlook. Five of the 16 African countries in the EMBIGD benchmark are projected to record positive GDP growth this year. While real GDP for the remaining countries, on average, is not expected to reach pre-pandemic levels until 2022, the distribution exhibits slightly favourable skew when stacked against the broader EM universe (Figure 1).
Figure 1: When Will Real GDP Reach 2019’s Levels?
This is perhaps noteworthy given the relative magnitude of the region’s fiscal response, although there is considerable heterogeneity across the degree and type of measures enacted (Figure 2). While monetary policy has broadly eased (Figure 3), most countries operate under currency pegs or stabilized arrangements, which constrains their ability to enact conventional monetary stimulus.
Figure 2: Fiscal Response to Covid-19 Crisis
Figure 3: Change in Nominal Policy Rate*
Fiscal and monetary policy and the projected pace of economic recovery influence a country’s debt sustainability. Per the IMF’s forecasts, 24 of 53 non-African EMs (~45%) are expected to see debt-to-GDP increases over the next three years (Figure 4).4 In this respect, African countries fare reasonably well: six of 16 countries (~38%) are expected to see public debt increases, with half of these cases—Cote D’Ivoire, Nigeria, and Tunisia—registering an increase below three percentage points.
Figure 4: General Government Debt-to-GDP for EMs (left) and Africa (right)
Even if public debt is on the right trajectory, servicing capacity bears monitoring. Figure 5 highlights forecasted interest expenses as a percent of general government revenue (excluding grants). For Ethiopia, Kenya, Namibia, South Africa, and Tunisia, this ratio is expected to steadily increase over the medium-term horizon. And while the trend is improving for Ghana, interest expense remains high. Per this metric, Africa’s servicing capacity is one of the highest amongst its regional peers.
Figure 5: General Government Interest Expense
While the general government servicing ratios in Figure 5 are elevated, the external payment schedules appear manageable, albeit wide ranging. Most countries have near-term debt service obligations of around $500 million or less, though Ghana and Egypt stick out as exceptions. More broadly, the region’s external liquidity buffers were mixed coming into the crisis, with most countries generally falling towards the bottom of their peer group across standard metrics.5 Still, any loss in FX reserves this year (Figure 6) has been mitigated, in many cases, by support from International Financial Institutions, particularly the IMF’s emergency financing programs (Figure 7).
Figure 6: FX Reserves*
Figure 7: IMF Emergency Financing
African countries have weathered the pandemic better than initially feared, but, like the rest of the world, they have suffered economically. There is cautious optimism that the debt burden is on the right trajectory and growth will recover, but uncertainty remains elevated and external debt and liquidity metrics bear monitoring. Moreover, the region remains dependent on the global backdrop via commodity prices, advanced economies’ trade policies, and most importantly the evolution of the pandemic. Therefore, we are selectively overweight African credits where potential for alpha generation is greatest, but prefer the shorter end of the asset class as we continue to monitor the region’s debt trajectory.
This material reflects the views of the authors as of November 12, 2020 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.
1Africa and the EMBIGD returned 20.60% and 15.04% in 2019, -7.19% and -4.26% in 2018, and 13.86% and 10.26% in 2017, respectively.
2Data retrieved from ourworldindata.org as of October 31st, 2020.
3See BBC News, “Coronavirus in Africa: Five reasons why Covid-19 has been less deadly than elsewhere,” October 7, 2020.
4Forecasts for 2023 are not provided for Argentina or Lebanon.
5FX reserve coverage ratios and real effective exchange rate vs. its trailing 5-year average.
Giancarlo Perasso
Giancarlo Perasso is a Principal, Lead Economist for PGIM Fixed Income, based in London. Mr. Perasso is responsible for formulating the macro-economic outlook for the CEEMA region to support alpha generation in rates, FX and sovereign credit markets. Before joining PGIM in 2012, Mr. Perasso was the chief economist of Matrix-Redux, a London-based macro hedge fund with a strong emerging market focus. Prior to that he was the Global Head of Emerging Market Research at West LB, where he developed market-oriented global research, focusing on both external debt and local markets (FX and fixed income). Mr. Perasso was also a Senior Economist for Central and Eastern Europe (CEECs) at Chase Manhattan Bank and JPMorgan-Chase, and a member of the Chase research team ranked No. 1 in Emerging Market Research in both 1999 and 2000 by Institutional Investor. Mr. Perasso has also been an economist for the Organisation for Economic Co-Operation and Development (OECD), and has been a consultant for the World Bank and a visiting professor at Franklin College. He has published papers in revered journals on the transition process in CEEMA and emerging markets more generally, is a contributor to www.lavoce.info, Italy’s leading economic website, and has been a visiting professor to the Universita' Carlo Cattaneo of Castellanza, Italy. He received a BA in Social and Economic Sciences from Universita’ Commerciale Luigi Bocconi, and an MA in Political Economy from Johns Hopkins University.
Brian Levine
Brian Levine is an Associate on the Global Macroeconomic Research Team at PGIM Fixed Income. Mr. Levine is responsible for maintaining the team’s sovereign credit ratings model, providing coverage for countries in the CIS region, and further developing the Firm’s sovereign ESG framework. Prior to joining the Firm in 2018, he worked for the Federal Reserve Bank of St. Louis in the Bank’s research department. Mr. Levine holds a B.S. in Economics and Mathematics from Bentley University.
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