Aug. 18, 2020

Ravi Bhatia Tatonga RusikeRemy CarasseSebastien BoreuxSamira Mensah

Sub-Saharan Africa: Emerging From COVID-19?

Contents

2

Slide

Key Takeaways: Sovereigns 3

Key Takeaways: Banks 4

Sovereign Rating Highlights 5

Focus On The CFA Franc Zone 13

Debt Moratoriums For African Sovereigns 16

Banking Sector Highlights In 2020 20

Key Takeaways: Sovereign Balance Sheets Take A Hit

3

– The majority of our rating actions in SSA has been negative due to the impact of COVID-19.

– We expect real GDP growth to contract an average 1% in the Sub-Saharan countries we rate due to the COVID-19 pandemic.

– Prospects for an economic recovery will be mixed, depending on the health of the economy prior to the pandemic, the fiscal and monetary policy responses, and global growth and trade.

– On the fiscal side, we expect revenues to drop and spending to spike in almost all rated sovereigns, leading to rising fiscal imbalances for the next few years and a material increase in debt in most cases.

– Balance of payments positions have weakened, triggering some urgent external financing needs amid falling sources of foreign income and capital outflows from offshore investors.

Key Takeaways: Bank Earnings Are To Weaken

4

– Central banks across Africa have proactively supported banks operating in the region by swiftly cutting interest rates and injecting liquidity.

– Loan growth will remain subdued as banks will face higher nonperforming loans because of recessionary conditions. Regulatory forbearance could delay recognition of NPLs and will lead inevitably to higher credit losses.

– While central banks are supporting local currency liquidity, U.S. dollar liquidity will continue to be tight in Nigeria where foreign currency loans average about half of rated banks' total loans.

– We have taken negative rating actions on banks in South Africa, Nigeria, and Kenya because of COVID-19 impacts on their economies. We downgraded South African banks to 'BB-' to reflect the sharp economic contraction in 2020 and related higher impairments charges. We downgraded Nigerian banks to 'B-' in March because of the dual shock of the slump in oil prices and COVID-19-related setbacks for economic growth prospects. Lastly, we assigned a negative outlook to a bank in Kenya, reflecting the same rating action on the sovereign. Despite higher credit losses, we expect this crisis to be an earnings, rather than a capital, event for most systems.

– We generally do not rate financial institutions in these countries above the foreign currency sovereign ratings due to the direct and indirect effects that sovereign distress would have on banks' operations.

Sovereign Rating Highlights

5

Diversified Sovereigns May Stage A StrongerRecovery

– COVID-19: Despite lockdown efforts and a later start, the coronavirus continues to spread in sub-Saharan Africa. South Africa is by far the most affected, followed by Nigeria. However, most countries are starting to ease lockdowns. Youthful populations may limit fatalities.

– Real GDP growth: We expect a contraction of 1% on average in the 19 SSA countries we rate, with variation depending on economic structures, lockdowns measures, and spread of the virus. Hardest hit will be economies most reliant on tourism and commodities and with pre-existing fiscal and external weaknesses.

– GDP recovery prospects: These depend on the health of each economy prior to the pandemic, level of diversification, fiscal and monetary policy response, and global growth and trade. More diversified economies should fare better.

6

Fiscal And External Positions Are Set To Weaken Across The Board

– Fiscal positions: We expect revenues to drop and spending to spike in almost all rated sovereigns, leading to rising fiscal imbalances in the next few years and in most cases increases in debt--exacerbating debt concerns in the region.

– External and balance of payments positions: The pandemic has resulted in a deterioration of balance of payments positions and has triggered some urgent external financing needs amid falling sources of foreign income--lower current account receipts, remittances, and foreign direct investment, and higher capital outflows from offshore investors, especially in March and April.

– Financial support and debt relief: The IMF has provided immediate rapid financing for some of SSA’s most vulnerable members and doubled lending facilities. While other multilateral and bilateral lenders, and initiatives like the DSSI, are providing further support, it may not be enough.

7

Sovereign Rating SnapshotRating Snapshot Dec. 31, 2019 Aug. 18, 2020

Issuer Sovereign foreign-currency ratings Sovereign foreign-currency ratings

Angola B-/Negative/B CCC+/Stable/C

Benin B+/Stable/B B+/Stable/B

Botswana A-/Stable/A-2 BBB+/Stable/A-2

Burkina Faso B/Stable/B B/Stable/B

Cameroon B/Negative/B B-/Stable/B

Cape Verde B/Stable/B B/Stable/B

Congo Brazzaville B-/Stable/B B-/Negative/B

Congo, D.R. CCC+/Positive/C CCC+/Stable/C

Ethiopia B/Stable/B B/Negative/B

Ghana B/Stable/B B/Negative/B

Kenya B+/Stable/B B+/Negative/B

Mozambique CCC+/Stable/C CCC+/Stable/C

Nigeria B/Stable/B B-/Stable/B

Rwanda B+/Stable/B B+/Negative/B

Senegal B+/Stable/B B+/Stable/B

South Africa BB/Negative/B BB-/Stable/B

Togo B/Stable/B B/Stable/B

Uganda B/Stable/B B/Stable/B

8

The Average Rating Declines To ‘B’ From ‘B+’

Sovereign Ratings Have Weakened Since COVID-19

9

Source: S&P Global Ratings.

BB+

BB

BB-

B+

B

B-

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep

-08

Feb-

09

Jul-

09

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

Apr

-13

Sep

-13

Feb-

14

Jul-

14

Dec

-14

May

-15

Oct

-15

Mar

-16

Aug

-16

Jan-

17

Jun-

17

Nov

-17

Apr

-18

Sep

-18

Feb-

19

Jul-

19

Dec

-19

May

-20

Average GDP weightedrating

Average rating

Real GDP

We See Wide-Ranging Downturns And Recoveries

10

f--Forecast. Source: “Sovereign Risk Indicators,” S&P Global Ratings, July 14, 2020.

(12)

(10)

(8)

(6)

(4)

(2)

0

2

4

6

8

Rea

l GD

P g

row

th (%

)

2020f

2021f

Fiscal Outlook In 2020

11

GG--General government. Source: S&P Global Ratings, Sovereign Risk Indicators, July 14, 2020.

(40)

(20)

0

20

40

60

80

100

120

140

160

%

GG Balance/GDP

GG Interest/Revenues

GG Debt/GDP

External Outlook In 2020

12

Source: S&P Global Ratings, Sovereign Risk Indicators, July 14, 2020.

(100)

(50)

0

50

100

150

200

250

300

350

400

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

%%

Current accountbalance/GDP in2019 (left scale)

Current accountbalance/GDP in2020 (left scale)

Narrow net externaldebt/currentaccount receipts in2020 (right scale)

Focus On The CFA Franc Zone

13

WAEMU Has Stepped Into The Crisis With Stronger Fundamentals Than CEMAC Real GDP growth

Recovery Will Be Key For Fiscal SustainabilityGG Balance/GDP

CFA Franc Zone: COVID-19’s Toll

14

Sources: S&P Global Ratings, Sovereign Risk Indicators, July 14, 2020. f--forecast. GG-General government.

(4)

(2)

0

2

4

6

8

10

2017 2018 2019 2020f 2021f 2022f 2023f

%

Benin (B+) Burkina Faso (B)

Senegal (B+) Togo (B)

Cameroon (B-) Congo-Brazzaville (B-)

Sources: S&P Global Ratings, Sovereign Risk Indicators, July 14, 2020. WAEMU --West African Economic and Monetary Union. CEMA--Economic and Monetary Community of Central Africa. f--forecast.

(8)

(6)

(4)

(2)

0

2

4

6

8

2017 2018 2019 2020f 2021f 2022f 2023f

%

Benin Burkina Faso

Senegal Togo

Cameroon Congo-Brazzaville

Inflation In The CFA Franc Zone Is Significantly Lower Than In Rest Of SSA

CFA franc countries ranked by sensitivity to devaluation

CFA Franc Zone: WAEMU And CEMAC MembershipProvides Substantial External Buffers

15

Sources: “The Eco Era: What Will West Africa's New Currency Mean For The Region?” S&P Global Ratings, Feb. 17, 2020; IMF--World Economic Outlook, April 2020.WAEMU--West African Economic and Monetary Union. CEMA--Economic and Monetary Community of Central Africa. ECOWAS--Economic Community of West African States.

Most sensitive Least sensitive

0

5

10

15

20

25

WAEMU CEMAC Rest ofECOWAS

Rest of Sub-Saharan Africa

Infl

atio

n (%

)

Average inflation, 2000-2019 Inflation in 2020 (forecast)

https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?articleId=&ArtObjectId=11340083&ArtRevId=11&sid=&sind=A&.

Debt Moratoriums For African Sovereigns

16

The DSSI Is Unlikely To Be Enough

– In response to the coronavirus pandemic, G-20 countries have agreed to provide debt relief for many low-income countries under the debt service suspension initiative (DSSI).

– To the extent that "official" creditors provide debt relief, we would not likely view the failure to pay scheduled debt service as a sovereign default under our criteria.

– To the extent the private-sector (nonofficial) creditors provide debt relief, a country's failure to pay scheduled debt service would be viewed as credit negative, which in some cases could constitute a sovereign default under our criteria. However, we would assess the relevant issues and characteristics case by case.

– However, a debt moratorium will unlikely be enough because of high debt burdens and limited fiscal flexibility, which sovereigns will still need to address through domestic fiscal reforms, including consolidation to contain interest burdens.

17

Debt Service Suspension Initiative (DSSI)

18

Source: World Bank.

Country ParticipationPotential DSSI savings (USD)

% of 2019 GDP

Angola Yes 2,645.6 3.1

Benin No 13.7 0.1

Burkina Faso Yes 23.3 0.2

Cabo Verde Yes 14.9 0.7

Cameroon Yes 276.1 0.7

DRC Yes 104.4 0.2

Congo Republic Yes 146.2 1.3

Ethiopia Yes 511.3 0.5

Ghana No 354.1 0.5

Kenya No 802.6 0.8

Mozambique Yes 294.2 2

Nigeria No 107.5 0

Rwanda No 12.6 0.1

Senegal Yes 131.7 0.6

Togo Yes 25.8 0.5

Uganda Yes 95.4 0.3

Zambia Yes 139.2 0.6

$12.5 Billion In Interest Payments In 2020 Breakdown Of External Interest Payments

DSSI: External Interest Payments Distribution Skewed Toward Private Creditors

19

Source: S&P Global Ratings.

20%

15%

65%

Multilateral Bilateral Private creditors

$12.5 billion

0

500

1000

1500

2000

2500

3000

Egy

ptA

ngol

aK

enya

Sou

th A

fric

aN

iger

iaG

hana

Sen

egal

Zam

bia

Mor

occo

Cam

eroo

nM

ozam

biqu

eE

thio

pia

Con

go (B

razz

avill

e)U

gand

aB

enin

Rw

anda

Cap

e Ve

rde

Bur

kina

Fas

oB

otsw

ana

Togo

DR

C

Bil.

US

D$

Multilateral Bilateral Private creditors

Source: S&P Global Ratings.

Banking Sector Highlights In 2020

20

COVID-19: An Earnings Event For Most Rated Banks

– Loan growth: Transmission mechanisms are generally weak in Africa, and financial intermediation is low despite a wave of digital transformation and push for greater financial inclusion. We expect broadly muted loan growth as banks grapple with rising asset quality problems amid the contraction. This is despite swift action by central banks in Africa to soften credit conditions and support economies.

– Asset quality: We estimate credit losses will rise to 2.5%-3% through 2020-2021 and nonperforming ratios will remain high, despite regulatory forbearance, which could delay recognition of NPLs. Loan recoveries will slow, notably in Ghana, while restructured loans and write-offs will rise strongly in oil-producing countries. High sector and single-name-concentration and foreign currency lending remain sources of credit risks.

– Capitalization: We see the current shock as an earnings event for most banks we rate. We do not discount capital events for lower-tier banks, especially in case of sharp local currency depreciation.

– Liquidity and external refinancing risks: These risks are limited, except for Nigeria, where liquidity for the U.S. dollar financing of oil and gas exposures and trade finance flows tends to weaken in times of stress, given the lack of large and deep domestic capital markets in Africa. This has pushed Nigerian banks to raise funding on the international capital markets.

21

Monetary Policy Rate Actions Have Been Swift Credit To The Private Sector Will Remain Constrained

Central Banks Are Helping Banks NavigateThe COVID-19 Crisis

22

Source: Central banks. f--Forecast. Source: S&P Global Ratings.

0 10 20 30 40 50

Bank Al Maghrib (Morocco)

South Africa Reserve Bank

Central Bank of Tunisia

Central Bank of Kenya

Central Bank of Egypt

Central Bank of Nigeria

Central Bank of Ghana

%

March April May June July Cash reserve requirement

(10)

0

10

20

30

40

50

Egypt Ghana Kenya Morocco Nigeria SouthAfrica

Tunisia

%

2017 2018 2019 2020f 2021f

Nonperforming Loans Will Remain High Credit Losses Will Rise Sharply In 2020 Despite Regulatory Forbearance

Credit Risks Will Rise Across The Board

23

f--Forecast. Source: S&P Global Ratings. f--Forecast. Source: S&P Global Ratings.

0

5

10

15

20

25

Egypt Ghana Kenya Morocco Nigeria SouthAfrica

Tunisia

%

2017 2018 2019 2020f 2021f

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Egypt Ghana Kenya Morocco Nigeria SouthAfrica

Tunisia

%

2017 2018 2019 2020f 2021f

Banks’ External Refinancing Risk Is LimitedNet banking sector external debt as % of systemwide domestic loans

System Dollarization Is Linked To Higher Risk Of Currency Depreciation Liabilities in foreign currency as a % of systemwide liabilities

External Refinancing Risk Is Limited For MostBanking Sectors Except Nigeria

24

f--Forecast. Source: S&P Global Ratings.f--Forecast. Source: S&P Global Ratings.

(40)

(20)

0

20

40

60

80

100

Egypt Ghana Kenya Morocco Nigeria SouthAfrica

Tunisia

%

2017 2018 2019 2020f 2021f

0

5

10

15

20

25

30

35

Egypt Ghana Morocco Nigeria SouthAfrica

Tunisia

%

2017 2018 2019 2020f 2021f

Related Research

– Central Banks In Africa Are Guiding Banks Through COVID-19’s Economic Fallout, July 22, 2020

– The G20 External Interest Payments Moratorium Will Partly Ease African Sovereign Debt Service Burdens, June 24, 2020

– COVID-19 Impact: Key Takeaways From Our Articles, Aug. 13, 2020

– COVID-19 Deals A Larger, Longer Hit To Global GDP, April 16, 2020

– Various South Africa-Based Insurers Downgraded Following Sovereign Downgrade; National Scale Ratings Affirmed, May 4, 2020

– COVID-19 And Implications Of Temporary Debt Moratoriums For Rated African Sovereigns, April 29, 2020

– The Eco Era: What Will West Africa's New Currency Mean For The Region?, Feb. 17, 2020

25

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Analytical Contacts

26

Remy CarasseAssociate DirectorSovereign Ratingsremy.carasse@spglobal.com+33 14 420 6741

Ravi BhatiaDirector & Lead AnalystAfrica Sovereign Ratings ravi.Bhatia@spglobal.com+44 20 7176 7113

Sebastien BoreuxAssociate, Sovereign Ratingssebastien.boreux@spglobal.com+33 14 075 2598

Tatong RusikeAssociate DirectorSovereign Ratingstatonga.rusike@spglobal.com+27 11 214 4859

Samira Mensah, Director & Lead AnalystAfrica Bankssamira.Mensah@spglobal.com+27 11 214 4869

mailto:remy.carasse@spglobal.commailto:ravi.Bhatia@spglobal.commailto:sebastien.boreux@spglobal.commailto:tatonga.rusike@spglobal.commailto:samira.Mensah@spglobal.com

27

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Sub-Saharan Africa: �Emerging From COVID-19?�ContentsKey Takeaways: �Sovereign Balance Sheets Take A HitKey Takeaways: Bank Earnings Are To WeakenSlide Number 5Diversified Sovereigns May Stage A Stronger RecoveryFiscal And External Positions Are Set To Weaken Across The BoardSovereign Rating SnapshotSovereign Ratings Have Weakened Since COVID-19We See Wide-Ranging Downturns And RecoveriesFiscal Outlook In 2020External Outlook In 2020Slide Number 13CFA Franc Zone: COVID-19’s TollCFA Franc Zone: WAEMU And CEMAC Membership�Provides Substantial External BuffersSlide Number 16The DSSI Is Unlikely To Be EnoughDebt Service Suspension Initiative (DSSI)DSSI: External Interest Payments Distribution Skewed Toward Private CreditorsSlide Number 20COVID-19: An Earnings Event For Most Rated BanksCentral Banks Are Helping Banks Navigate�The COVID-19 CrisisCredit Risks Will Rise Across The BoardExternal Refinancing Risk Is Limited For Most�Banking Sectors Except NigeriaRelated ResearchAnalytical ContactsSlide Number 27