No country in Sub-Saharan Africa has seen a change in its overall risk rating, according to the September 2020 edition of Political Risk Quarterly Update by Aon.
The political risk newsletter, developed in partnership with Continuum Economics, says that Africa has the lowest number of COVID-19 cases in emerging markets, and a low fatality rate due to a young population and higher temperatures. Yet it has not prevented a massive economic hit from the virus. Economic implications are already visible, with foreign investment falling 58% year on year in the first three months of the year.
In addition, Senegal, Gambia, Equatorial Guinea, CAR, Cameroon and Burkina Faso have all seen a change in their banking sector vulnerability. Burkina, Gambia and Cameroon have seen their banking sector vulnerability increase, CAR’s, Senegal’s and Equatorial Guinea’s has decreased.
Most of these changes highlight the banking sector’s particular sensitivity to governments’ abilities to manage the COVID-19 crisis. In turn, it hinges upon the ability of COVID-19 funding to be translated into lending to the private sector. In other words, in Sub-Saharan Africa, banking sector vulnerability is highly codependent on institutional strength and absence of corruption.
In fact, corruption has had a major impact on the siphoning off of COVID-19 emergency funding, with even the most developed economy of the region, i.e. South Africa, dealing with significant misuse of funds. Kenya and Uganda have suffered a similar fate with deviation of COVID-19 funds.
Burkina Faso has a high overall risk level. COVID-19 has compounded existing challenges posed by the security crisis in the Sahel region, which is centred around Mali but has spread to other countries, including a previously stable Burkina Faso, where thousands have died last year alone. The crisis has resulted in a high number of internal displacements and humanitarian assistance needs. As a result of the crisis, vast swathes of the country are now ungoverned. Hence the IMF has disbursed a $115.9m COVID-19 loan to Burkina Faso. There are chronic shortages of ventilators to deal with COVID-19, with only 11 functioning ones for 19m citizens.
Banking sector vulnerability has increased to medium from medium-low, as non-performing loans have jumped as a result of the pandemic.
Cameroon presents a medium-high overall risk. It is facing urgent financing needs driven by the twin COVID-19 pandemic and terms of trade shocks. Externally, Cameroon is exposed to demand and supply shocks due to the slowdown in major trading partners China and Europe and falling oil prices. An increase in sovereign debt non-payment risk above the current medium-high is likely; indeed, Moody’s has placed Cameroon on negative watch for a downgrade due to the risk of losses to private investors from its decision to accept the G-20 moratorium on debt repayments. While the moratorium should have a positive impact on debt sustainability, a downgrade would offset this impact by increasing the cost of new debt issued on the markets. Banking sector vulnerability has increased to medium from medium-low, as the pandemic has increased non-performing loans.
South Africa remains a medium risk country, well above the regional average, although political violence risk and risk of doing business are both medium-high. The COVID-19 crisis has highlighted high levels of corruption, which have jeopardised the effectiveness of COVID-19 financing. Lack of structural reforms amid ANC internal divisions, the backlash of South Africa’s sovereign downgrade to junk in March, just as the COVID-19 crisis was taking off, and the final blow of COVID-19 itself pose upside risks to sovereign non-payment risk, which is still at medium for now.
The government’s ZAR500bn ($29.2bn) stimulus, which includes ZAR200bn in loans to businesses, has intensified this risk, with the government’s budget deficit projection for 2020/21 doubling to 15% of GDP.
The IMF agreed to a $4.3bn COVID-19 emergency loan to South Africa at the end of July, which is the largest financing it has given to a pandemic-hit country. While it is not tied to specific conditions on paper, the IMF is expected to pressure South Africa to deliver structural reforms for continued disbursement in practice, and a regular IMF structural adjustment programme cannot be ruled out once the emergency funding runs out.