According to Chaucer, a major specialist (re)insurance group, African countries saw just 15 sovereign downgrades and four upgrades last year. The wave of downgrades in Africa bucks the global trend of net upgrades, compared with 20 downgrades and 48 upgrades in the rest of the world (excluding Africa) last year.
Rising global interest rates and unstable currency markets are putting strain on many African countries, while civil unrest and regime change in Central African countries are also affecting the credit ratings of some countries’ sovereign debt.
Sovereign downgrades often stimulate demand for political risk insurance, which protects companies against the risk that a financially troubled country will be unable to honour its contracts with them.
African countries account for 43% of all sovereign downgrades
In the past 12 months, African countries accounted for 43% of global credit downgrades (15 out of 35), and more than a quarter of all sovereign downgrades (10 downgrades, 29% of the total) occurred in sub-Saharan Africa alone.
Central banks have raised interest rates globally, raising borrowing costs for many African countries, while a stronger dollar has also made it more expensive to repay foreign-currency denominated debt.
Rising global interest rates mean governments have to pay higher coupons on new bonds and higher payments on index-linked bonds, making it harder to repay their debt.
A downgrade of a sovereign’s debt often further increases a country’s borrowing costs, potentially leading to a downward economic spiral.
“Many African countries face both external financial pressures and internal political pressures. These challenges are scaring away investors with lower risk tolerance,” said Jonathan Bint, senior analyst and underwriter at Chaucer.
“The debt downgrades have also caused companies with commercial contracts, such as infrastructure investments, to reassess their exposure to these countries and consider whether they need further insurance to limit losses.”
Sovereign downgrades concentrated in the Southern Hemisphere
Four of the five downgrades occurred in the Southern Hemisphere, with Latin America and the Caribbean accounting for more than a quarter of the downgrades (11, or 31% of the total). The Middle East and North Africa (MENA) region saw seven downgrades, or 20% of the total.
Among sub-Saharan African countries, Ethiopia (-4), Niger (-3) and Cameroon (-2) were the biggest downgrades. Ethiopia and Cameroon have been plagued by long-running separatist conflicts in the Tigray and Ambazonia regions, respectively, while Niger saw a sudden change of government last year.
Countries in West and Central Africa have seen multiple changes of government in recent years, with coups in Niger and Gabon raising fears that business assets may be seized, and civil war flaring up in Sudan last year that is sending economic repercussions across the region.
“Any change in government creates uncertainty for businesses, especially if it’s a sudden change of government,” says Jonathan Bint.
“Cancellation of contracts is one of the main concerns businesses have with the new government.”
“Frequent changes of government have increased the demand for breach of contract compensation, especially in unstable regions.”
The Northern Hemisphere has an advantage
By comparison, the G7 countries only experienced one downgrade last year. The European Economic Area (EEA) and Switzerland experienced two downgrades and 12 upgrades, accounting for 23% of the total upgrades globally.
Fifty-two countries had their sovereign bonds upgraded last year, a 33% increase over the number of upgrades in 2022/23. Latin America and the Caribbean alone saw 19 sovereign bond upgrades, accounting for 37% of all sovereign upgrades globally. The high number of upgrades in Latin America and the Caribbean effectively meant that the region saw eight sovereign bond upgrades last year.
Jonathan Bint said: “Northern hemisphere economies have performed relatively well over the past year, and sovereign ratings in the EEA and Switzerland have improved significantly.”
“Further sovereign downgrades will increase risks for businesses globally. If they do not protect themselves, they could be at risk.”
*Analysis of sovereign rating data for the year ending May 13th from ratings agencies Fitch Ratings, Moody’s and S&P Global Ratings.
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