Macro Analysis /

Fitch flags 10 African countries at risk of rating downgrades

  • Forex: Nigeria devises a plan to boost the country’s foreign exchange through proceeds from non-oil exports

  • Fixed Income: Rising debt levels and international interest rates are heightening the risk of credit rating downgrades

  • Macroeconomic: Bullish bias in oil remains entrenched as oil rises above the $95/bbl mark

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
14 February 2022
Published byETM Analytics


The standoff on Ukraine's border is one factor that holds the potential to rock markets, just as US earnings and some of this week's data do if they change expectations on US interest rates. For now, it remains challenging to pick clear direction on currency markets and the USD, with many cross-winds blowing. Directional momentum is weak, and the consequences of a transition from an ultra-accommodative monetary policy world to a more normalised world holds much risk for asset prices as central banks remove one of the key drivers of equity markets.

In the commodity space, base metals witnessed strong losses into the close of the week as investors took profits after the strong run to the topside. Threats of tighter monetary policy and weaker economic growth as a result relegated the bulls to the sidelines, with the likes of copper shedding 3.91%, while aluminium finished the session down 3.57% on the day. This morning there is evidence of bargain hunting in Asia as the metals counters right themselves following Friday’s fall. Aluminium is around 2.3% higher on the day marking time at $3210.00/tonne as the EU opens with the conflict over the Ukraine front and centre. The threat of sanctions against Russia should they invade Ukraine has given rise to fears of higher energy costs as Russia get locked out, and the nat gas market becomes tighter than it already is. This will lead to further mothballing of aluminium production capacity as it becomes unviable to smelt given the high input costs. Aluminium production takes an incredible amount of electricity to produce, and we have already seen extensive capacity in both the EU and China go offline due to the higher energy costs.                                     


Uganda: Policymakers at the Bank of Uganda are set to deliver their benchmark interest rate decision. The BoU retains a prudent stance on monetary and has provided a stable platform for the economy to recover. This is expected to remain the mandate for the foreseeable future, especially as inflation remains subdued. Headline inflation is below the lower end of the central bank’s 3% -7% target range.

Ethiopia: The Ministry of Trade and Regional Integration reported that Ethiopia’s export earnings fell short of expectations by 5% in the first half of the fiscal year. Specifically, the country recorded $1.89bn in export revenue in the first half of the fiscal year through January 7, against a target of $1.98bn. The ministry cited under-invoicing, illegal trade, smuggling, and proliferation of substandard products as some of the reasons for missing the target. The earnings include $273mn from gold and $1.3bn from agricultural commodities. Note that Ethiopia is targeting export revenue of $5bn for the full fiscal year through July 7.

Ghana: Finance Minister Kenneth Ofori-Atta said that Ghana will not seek the support of the International Monetary Fund (IMF). According to the minister, “whatever we do, we are not going to the IMF. We are a proud nation. We have the resources. We have the capacity. We are not people of short sight.” Note that market talk has raised the possibility of Ghana needing to seek IMF support to restore investor confidence if the government can’t refinance in the Eurobond market and with China more cautious about lending to African countries. Recall last Thursday, the IMF said that Ghana had not requested a financial program and that they stand ready to support the country in any way deemed useful by authorities.

Kenya: Weekly data from the Central Bank of Kenya showed that foreign reserves decreased slightly from $8,224mn on February 3 to $8,196mn on February 10 as the bank continued to support the local currency. According to the CBK, the current level of foreign exchange remains adequate and equates to 5.01 months of import cover. This meets the bank’s statutory requirement to maintain at least four months of import cover and the EAC region’s convergence criteria of 4.5 months of import cover.

Uganda: On the back of poor weather reducing yields in the eastern growing region, Uganda has cut its coffee production forecast for the 2021-22 season by as much as 18%. According to the Uganda Coffee Development Authority, output is expected to be between 9mn to 9.1mn bags in the year through September. That compares with an initial projection of 10.5mn to 11mn bags three months ago. Lower coffee production could detract from export earnings which have in part supported the resilience of the Ugandan Shilling.

Botswana: The government has adjusted the country’s entry restrictions from today stating that those wishing to enter Botswana will need to show proof of being fully vaccinated. Vaccinated individuals will no longer need to show proof of a negative PCR test. Equally, unvaccinated persons must be willing to be vaccinated at the port of entry they’ve at or face deportation. Returning citizens who are unwilling to get the jab face a fine of R6 500, imprisonment for a year or both.

Botswana: Locals will be gearing up for the inflation reading tomorrow which has the risk of outperforming to the topside. The world is in an environment of sustained inflationary pressures with soft commodity and energy prices remaining lofty. Up until now the Bank of Botswana has preferred to take the view that the current spate of inflation is transitory, this may change in the coming months with economists and analysts alike seeing certain parts of the inflation equation as structural in nature.

Forex: Nigeria devises a plan to boost the country’s foreign exchange through proceeds from non-oil exports

The Central Bank of Nigeria has devised a plan to lure $200bn of inflows and make it attractive for exports to bring home foreign currency. CBN Governor Godwin Emefiele has indicated that the central bank will stop selling USDs to local banks and will instead ask lenders to source foreign currency on their own. The CBN plans to make it attractive for exporters to purchase the local currency and bring their overseas earnings home. Companies have so far been dissuaded by the 27% disparity between the official and parallel market exchange rates of the Naira in repatriating foreign currency to Nigeria.

Note that the CBN has struggled to boost dollar supply and often changed rules, and the latest plan will be the biggest change since it stopped selling foreign currency to money changers. The regulator, which has devalued the currency three times since 2020 after a slump in crude oil prices hit inflows, expects the measures to boost foreign-exchange supply in the next three to five years. According to the Governor, this is also in line with the bank’s commitment to boost the country’s foreign reserves through proceeds from non-oil exports.

Just how effective the banks will be in comparison to the CBN when it comes to getting exporters to repatriate their proceeds to Nigeria remains to be seen. Without any certainty that there will be an increase in the repatriation of proceeds if the CNB goes ahead with the plan, risks for the Naira to weaken further exist.

Fixed Income: Rising debt levels and international interest rates are heightening the risk of credit rating downgrades  

In a statement released on Sunday, Fitch warned that rising government debt levels and international interest rates are heightening the risk of credit rating downgrades in at least 10 African countries. Fitch said that the countries most at risk of a downgrade are Kenya (B+/Negative), Lesotho (B/Negative), Ghana (B-/Negative), Rwanda (B+/Negative), Namibia (BB/Negative) and Uganda (B+/Negative).

In a separate report published last week, Fitch said that more than half of Sub-Saharan African countries will witness a continued rise in the debt-to-GDP ratios in 2022 and 2023. The agency highlighted the following as the main drivers of debt risk:

  • Social-political instability.

  • The lack of vitality and conviction in the economic growth of developing countries.

  • Unstable and insufficient public investment.

  • Mismanagement of borrowed funds.

  • Stalling of already inaugurated government projects.

In its report published yesterday, Fitch said that a rise in government debt-to-GDP would be a potential negative rating action trigger for most SSA sovereigns, particularly those whose ratings are on a negative outlook. The agency added that the marked deterioration in external lending conditions has triggered further downgrades in the credit ratings of the Sub-Saharan countries.

Not all was bad, though. Fitch flagged Angola and Gabon as two of the standout countries. Recall that both Angola and Gabon have witnessed credit rating upgrades in recent months, partly driven by a surge in oil prices, which has significantly boosted the finances of the two countries. In addition to the rally in commodity prices, several African countries are experiencing rapid economic growth as tourism recovers. Looking ahead, sovereign credit ratings should continue to play an important role in determining which countries investors should stay away from or, on the flip side, be investing in.

Macroeconomic: Bullish bias in oil remains entrenched as oil rises above the $95/bbl mark

Oil was heading for its first weekly loss since December last week, but a surge in prices on Friday meant that it continued with its bullish rally for an eighth straight week now. The commodity remains bid this morning, with Brent rising above the $95 per barrel handle as concerns remain over the Russia-Ukraine situation. Traders are also increasingly struggling to get their hands on actual barrels of oil, with prompt spreads widening out further while the dated-front-line swap spread has widened out to a record level at over $2.35 per barrel. These swaps are used to hedge against the difference between physical prices and futures prices.

Brent’s prompt spread, meanwhile, has surged to $1.92 per barrel, up from 70cents a month ago, in a sign that oil likely still has topside to come, bringing the $100 per barrel mark into view. Our view remains, however, that the current bullish momentum will not be sustained into the second half of the year, with US supply set to rise as rigs increased by their most in four years last week, while talks with Iran are progressing to suggest supply levels should be ramped up. The risk to this view, of course, is the Russia-Ukraine saga. If tensions erupt here and Russia chooses to invade Ukraine, the oil market will be sent into a tailspin and prices will surge.