Declining FDI inflows resulting from a drop in global risk appetite will pose the greatest challenge to African governments maintaining their economic growth, warned rating services agency Standard & Poor’s.
Austerity measures put in place in the US and across Europe, and global risk aversion increases due to ongoing economic uncertainty, will cause a decrease in FDI and portfolio inflows to African economies, many of which remain dependent on trade with the west.
Commenting on the rated African sovereigns, Christian Esters, senior director of sovereign ratings at Standard & Poor’s, said: “We see a number of risks going forward, which depend on the global economic outlook. If international risk aversion increases, that would most likely affect Africa. We saw this in 2009, where there was a huge outflow of African portfolio investments due to what was happening [globally]. So that is the risk, that it could once again [result] in decreases in FDI and portfolio flows.”
Nonetheless the economic growth of the 19 rated African countries, particularly those in sub-Saharan Africa, is expected to remain solid over the next two years, according to Standard & Poor’s.
High public spending, strong commodity exports and increasingly diversified trade with emerging economies are some of the factors that have improved their resilience, and this has caused a rise in investor interest. However, the agency observed that growth rates within the continent will diverge.
"In terms of GDP growth rates, non-oil exporters have grown stronger over the past couple of years than oil exporters,” said Mr Esters. “That reflects the fact that many oil exporters, [which] on the one hand have benefited from oil prices, have not seen their production levels necessarily increase [as] much.
"For example, Nigeria's production of oil has actually decreased over the past four to five years in a row. In some other cases like Gabon, some of the oil fields are maturing. So in real terms, their GDP has been growing less than might have been expected, despite the higher oil prices. We expect the non oil exporters to continue to have somewhat higher growth rates than the oil exporters. There are specific countries like Ghana, which recently started oil production. In Ghana, growth rates have been at 14% over the past few years."
Another concern highlighted by the agency was a rise in fiscal debt across the rated countries. This was in large part due to the global economic crisis, as most African countries employed automatic stabilisers and counter-cyclical fiscal policies to absorb the concurrent economic shocks at the time.
"If you compare the fiscal debt in 2012 with [what it was] five years ago, in most countries we see a significant increase of fiscal debt over the past couple of years," said Mr Esters. "That reflected increased infrastructure spending, as well as the effects of what happened in 2009, [where] fiscal revenues dropped at the time. In some cases it also reflects strong increases in wage spending. So you see that in most of sub-Saharan Africa, we rate the fiscal debt level as a percentage of GDP higher today than it was five years ago.
"The fiscal balances even this year and next year are still weaker than what we saw pre-2009. The debt levels [are] higher [and] we believe that the flexibility for many governments to absorb another global or local shock through counter-cyclical policies [and] automatic stabilisers is lower now than it was five years ago."