The strong growth potential in sub-Saharan Africa (SSA) is vulnerable to negative market sentiment thanks to another ratings downgrade for regional giant South Africa, and global recessionary pressures that are forcing down commodities prices, ministers warned on Saturday.
The International Monetary Fund forecasts that growth in the SSA economies will continue to buck the recessionary global trend, accelerating to 5.7% in 2013 from this year’s expected 5.0%.
But on Saturday Standard & Poor’s downgraded South African sovereign foreign currency bonds to BBB from BBB+ and local currency bonds to A- from A with a negative outlook. The move was expected, but analysts said the negative outlook S&P assigned to South Africa also raises the risk of a further downgrade next year.
Namibian Finance Minister Saara Kuugongelwa-Amadhila told Emerging Markets the downgrade “will have an impact”, but “a lot of it is about perceptions and we believe that when the excitement settles down the fundamentals are strong in the South African and Namibian economies.” While “South Africa is confronting significant economic and social challenges”, markets should see that both rand zone partners “are well able to repay their debts”.
Although Namibia issued its debut bond during the height of the global crisis, it was still three times oversubscribed, and “investors showed huge confidence in the region” with the recent 12 times oversubscribed Zambian eurobond, Kuugongelwa-Amadhila said. Such confidence was “deserved” after a long period of reform implementation by SSA economies.
Ministers were confident borrowing was under control, when asked by Emerging Markets whether a new African debt bubble might emerge. “We have generally learned from the negative lessons of the past,” Kuugongelwa-Amadhila said.
This comes against the background of a generally bullish SSA growth story that has seen investors reassessing African debt and equities as an asset class.
The IMF’s Regional Economic Outlook, published on Saturday, said “economic conditions in sub-Saharan Africa have remained generally robust against the backdrop of a sluggish global economy”, although a few middle income economies, led by South Africa, will find the “weak external environment a drag on growth”.
Some economies such as Guinea are growing even faster. Finance Minister Kerfalla Yansane said that while most SSA economies were “rather sheltered from the global crisis, as a commodities producer we are vulnerable to the morose global outlook.”
Guinea’s economy is underpinned by mining projects, including the Simandou iron ore scheme.
“If commodities prices hold up over the next three to four years we could have double-digit growth, but if growth in China falls it could be a problem,” Yansane said. “But I believe Chinese growth will remain at 7-8%, which will be sufficient.”
“Africa has changed to become an economy that can better manage its affairs, said John Rwangombwa fast-growing Rwanda’s Finance Minister. But “the buffer is being eaten away.”