Ghana, Kenya, Mauritius, Tanzania and Uganda have been dubbed the real fragile five. All are looking risky with their large imbalances.
However, selecting a new set of at-risk borrowers is fraught with complications if the sole focus is on current-account and/or fiscal imbalances.
A more holistic assessment using Euromoney Country Risk Survey data suggests Nigeria’s rising risks should not be ignored, and neither should those of several other sovereigns in the region.
Shifting focus
Brazil, India and Indonesia, three of the five deemed vulnerable to US Fed tapering, have stabilized this year, climbing one place each in ECR’s global rankings since 2013. Their currencies have regained strength as financing doubts have diminished.
Turkey’s political problems have seen it slide another three places in the survey to 51st out of 189 countries, Russia – outside the original F5, but also tottering – has gone into free fall after the crisis in Ukraine, while South Africa has dropped one place to 54th, eight steps in all since Q3 2013.
Its plight is easily explained. Hobbled by labour unrest and a weakened export-market environment, GDP growth underperformed last year.
A rebound is expected, assisted by a more competitive exchange rate, but budget and current-account deficits exceeding 4% and 6%, respectively, will persist according to the latest African Economic Outlook, an annual report produced jointly by the African Development Bank, OECD and United Nations.
One of many risky African sovereigns
South Africa is not alone in the deficit stakes in a region bedevilled by imbalances, heightening investor risk and questioning its outperformance. Some 38 of 47 countries in SSA have excessive current-account deficits exceeding 3% of GDP – several are much higher than that, stretching into double digits.
Leaving aside questions concerning the suitability of large external deficits that might be perceived as over-investment in future growth potential, a fragile five of Ghana, Kenya, Mauritius, Tanzania and Uganda has rightly turned attention to the region’s vulnerabilities.
All five have extremely large current-account deficits and must cope with fiscal imbalances, but it would be wrong to focus solely on those borrowers, or consider them equally risky.
The ECR survey takes a more holistic view, surveying 15 indicators across a broad spectrum of economic, political and structural risk factors, as well as incorporating values for credit ratings, and debt and capital access to provide a total risk score.
On that basis, Africa’s fragile five are certainly risky, embedded within tiers four and five, ECR’s highest risk categories, with just seven points out of a possible 100 separating 87th place Ghana from Uganda lying 117th.
Yet, among them, B-rated Kenya (now 98th) has climbed seven places in the global rankings since 2013, with ECR’s experts ignoring the security risks to focus more on its improving macro fundamentals – including solid growth, and narrowing fiscal and external deficits.
Contrast that with BB-rated Nigeria (86th), just one place above Ghana, but having slid two places in the rankings since 2013. The Nigeria-Kenya risk differential has narrowed from almost five points in Q1 2013 to little more than three points so far this year.
Unlike other large SSA sovereigns, Nigeria has a current-account surplus and a rather small fiscal deficit of less than 1.2% of GDP to find favour among investors.
Yet with the government sure to increase public spending in the lead up to next year’s elections, and monetary policymaking risks heightened after the ousting of the central bank governor, scores for a range of Nigeria’s risk factors have fallen.
They include bank stability, monetary policy/currency stability and government finances. Government stability and repatriation risks have also increased.
Nigeria performs better than Kenya on five counts, but is already trailing on six more (see chart). However, it isn’t the only SSA sovereign sliding.
Apart from the countries mentioned, 30 more of Africa’s borrowers have registered score declines during the past year.
Suffering from political risk and weakened capital-market access, Botswana – still one of only three tier-three sovereigns in the region, alongside South Africa and Namibia – has been sent careering down below South Africa to 56th.
Angola is down six places to 97th, and other smaller, higher-risk tier-five sovereigns – including Burkina Faso, Liberia, Malawi, Gambia and Ethiopia – have all suffered downgrades.
Only Zambia and Senegal have enjoyed unbroken rising score trends, with the former rising into tier four and the latter closing in on a similar fate. Even Namibia, Gabon and Congo saw their upward score-trends partially reverse during Q1 2014.
Africa’s fragility seems more widespread.
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