Archive for the ‘Africa’ Category

Don’t Forget Nigeria…

August 6, 2009

…Africa’s second largest economy and a potential rising regional power.

Nigeria, with about $215 billion in GDP last year, follows South Africa and leads Egypt in Africa in terms of the size of its economy, but lags both countries in wealth per head, with roughly $1350 of GDP per capita.  Nigeria relies very heavily on oil exports to fuel its economy.  Recent high oil prices have provided this classic developing country — with its poverty, mineral wealth, political instability and corruption, as well as reforms and emerging institutions —  with strong GDP growth and a strong external balance sheet (foreign exchange reserves in excess of government liabilities to foreigners).  With 155 million people, 250 ethnic groups, many languages, and a 50%-40% Muslim-Christian divide (view map below), this simmering rising power in West Africa is one to watch, if not next year, then some time this century.  Check out the CIA Factbook on Nigeria.

Of note is the ongoing conflict between the government and Islamic militants, putting Nigeria right smack on one of Huntington’s fault lines between civilizations.  See this article on recent unrest

Nigeria: At the Faultline Between Islam and Christianity  Source: Nigeria: At the Faultline Between Islam and Christianity Source:

Of interest as well is Fitch’s report on Nigeria, published last month, when the agency affirmed the country’s sovereign ratings.  See below.

“Fitch Affirms Nigeria at ‘BB-‘/’BB’: Outlook Stable   

03 Jul 2009 6:30 AM (EDT)

Fitch Ratings-London-03 July 2009: Fitch Ratings has today affirmed the Federal Republic of Nigeria’s Long term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-‘ and BB’ respectively. The Outlook is Stable. At the same time, Fitch has affirmed the Short-term foreign currency IDR at ‘B’ and the Country Ceiling at ‘BB-‘.

“Nigeria’s strong sovereign balance sheet is the main support to its ratings. Although weakened by a major reserve loss since September 2008, its balance sheet still stands out amongst its rating peers,” says Veronica Kalema, a Director in Fitch’s Sovereign Department.

“Earlier banking sector consolidation also resulted in a well-capitalised banking system, which together with Nigeria’s strong overall and public net external creditor position and low government debt, have helped cushion the economy against the collapse in oil prices, the global recession, a reversal of capital flows and the banking sector’s exposure to a sharp fall in equity prices. With some signs of global stabilisation now apparent and a recovery in oil prices, Nigeria looks likely to weather the shocks,” adds Kalema.

The government moved swiftly to base the 2009 budget on a lower benchmark oil price of USD45/barrel (Fitch has a forecast of USD55/barrel for 2009 and the oil price is currently around USD70/barrel). Nevertheless, oil production shortfalls below the budgeted 2.3 million b/d continue to present a serious revenue challenge. However, this will be offset by the higher- than- budgeted oil price, reduced disbursements from the Excess Crude Account (ECA) and likely under-execution of the Federal Government (FG) budget. The domestic debt market provides financing flexibility for the FG and a few sub-nationals that have started to tap it to fund development spending. Nevertheless, sub-nationals face a serious revenue squeeze, and there is a risk that this will result in further disbursements from the ECA. Fitch forecasts small budget deficits at the FG and consolidated government levels and continuing low public debt of 12% of GDP in 2009, well below the ‘BB’ median.

The Central Bank of Nigeria (CBN) at first used reserves to support the naira in the face of lower oil revenues and capital outflows in the second half of 2008. Amid some confusion as to its policy goals, which heightened speculative pressure, CBN starting in late November eventually engineered a roughly 20% depreciation and stabilised the market, albeit by resorting to a temporary reversal of foreign exchange liberalisation. The naira is now at a more realistic rate consistent with lower oil prices and restrictions have begun to be eased. Despite a significant depletion of reserves by 28% to USD44.8bn in May 2009 since the peak of USD62.1bn in September 2008, low foreign liabilities of both the public and private sectors mean that Nigeria’s external balance sheet remains robust and is still one of the strongest in the ‘BB’ category. The recent increase in oil prices, if sustained, should slow the pace of reserves depletion. However, the reserves cushion has been eroded and any renewed bout of lower oil prices would likely trigger further downward pressure on the exchange rate, accelerate reserves depletion and is likely to bring negative rating action.

Unlike other countries in the region, Nigeria’s banking system has been under strain due to margin loan exposures to the sharp fall in equity prices. The loss of confidence together with lower oil revenues has also resulted in a liquidity squeeze on the money markets which, despite measures to inject liquidity, is still not fully alleviated. Although the system’s high capitalisation means that it can absorb the bulk of the losses without any support from the sovereign, the problems have exposed severe weaknesses in banking regulation and risk management. These will be the key focus of the new central bank governor, Lamido Sanusi, who as a former banker is well-qualified to address them so as to restore confidence in the financial system so that it can better support real sector development.

Nigeria’s ratings are hampered by data weaknesses and lack of transparency in several key areas including public finances, the balance of payments, international reserves and the banking system. Improvements are essential to enhancing creditworthiness.

Following an average of 6%+ growth in 2004-2008, in 2009 growth will slow to around 3%, reflecting much lower fiscal spending, private credit growth, remittances and oil prices/production. However, this will be in line with regional growth and much higher than the ‘BB’ median. Reforms and investment in infrastructure have slowed under the current administration, although there are now signs of revival. Niger Delta (ND) insecurity has further reduced oil production this year and is an ongoing rating constraint. More broadly, it has adverse implications for the government’s power and gas sector strategies necessary for further diversification and raising Nigeria’s growth potential. Improvements in the ratings will also depend on sustaining non-oil growth and raising per-capita income by addressing infrastructure through investment and reforms.

A copy of the sovereign report on Nigeria will be available shortly on Fitch’s website

Contact: Veronica Kalema, London, Tel:+44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357

China & Africa: Imperialism, Corruption, Growing pains

August 2, 2009

China's rising presence in Africa.  Source:  Google Images

An article on a corruption investigation in Namibia related to Chinese investment there appeared in the NYTimes on Friday.  China is confronting the growing pains of being an “imperial” power, as this giant nation increases its FDI and access to raw materials and markets in Africa, Latin America and elsewhere.  Just like imperialists that came before, since the scramble for Africa in the late 19th century, bribes and other forms of less-overt control are hard to resist.  I explored China’s challenge of cleaning up corrupt practices related to international commerce in an earlier post, and my colleague David Kampf  looked into the BRICs rising profile in Africa

One question is whether China, as it rises, will follow the path of the U.S. (and other Western powers) of attempting to reduce corrupt practices in international commerce.  The U.S. Foreign Corrupt Practices Act of 1977 sought to eliminate the bribing of foreign officials and increase the transparency of business relations.

South Africa: Managing the economic crisis

July 30, 2009

South Africa: Africa's Largest Economy  Source:

Africa’s largest economy, with US$276 billion in GDP, is the continent’s rising power.  With 48 million people, it is not the continent’s most populous, with a lower population than oil-rich Nigeria (155 million) and Egypt (80 million), the world’s most populous Arab nation.  But South Africa is richer than these countries, in spite of its more skewed income distribution — South Africa has a Gini index of income inequality of 57.8, similar to Brazil’s, and worse than Egypt’s 34 and Nigeria’s 43.7.   And, with unemployment of 23%, this regional power has substantial structural challenges.

A national election in April-May 2009 occurred smoothly, after an intra-ANC power struggle resulted in the resignation of President Mbeki, post-Apartheid South Africa’s second president, following Nelson Mandela, the country’s George Washington and a major moral force in the world.  The ANC holds nearly two-thirds of the seats in the National Assembly, lording over a few much smaller opposition parties.  The ANC, which has held power for fifteen years, has much more to do to overcome the country’s nagging social problems and unleash its growth potential.

Fitch Ratings affirmed South Africa’s sovereign ratings this week, with the foreign currency rating of BBB+, the same as Libya’s ratings, but higher than all the other sixteen African nations Fitch rates.  South Africa is rated the same as Mexico, a notch higher than Russia, and two notches higher than Brazil and India.  Its credit strengths include low, though rising, public debt and good, though not stellar macroeconomic performance.  The economy grows less rapidly than other BBB sovereigns, expanding an average of 4.7% per year in the five years through 2007.  Its public debt is on the rise, given much needed infrastructure spending and a severe skills shortage.  Its banking system is strong relative to other emerging market economies (EMEs).  The economy has experienced only a modest slowdown as a result of the global economic crisis.  South Africa’s ratings were given a Negative Outlook in November 2008, along with many other EMEs, as Fitch concluded that the so-called “decoupling” of these economies from what was going on in the developed world was not a reality.  Since then, South Africa seems to have weathered the storm fairly well, with capital inflows resuming, though Fitch is taking a wait-and-see attitude.   South Africa’s wide current account deficit, at over 7% in recent years, financed in part by volatile portfolio capital, leaves the country vulnerable to external shocks.

Fitch published a report on South Africa this week, and its accompanying press release can be found below. 

“Fitch Affirms South Africa at ‘BBB+’; Outlook Remains Negative   

27 Jul 2009 6:23 AM (EDT)

Fitch Ratings-London-27 July 2009: Fitch Ratings has today affirmed all of South Africa’s sovereign ratings. The country’s Long-term foreign currency Issuer Default Rating (IDR) is ‘BBB+’ and the Long-term local currency IDR is ‘A’, while the Short-term foreign currency IDR is ‘F2’. The Outlooks on the Long-term foreign and local currency IDRs remain Negative. Fitch has affirmed the Country Ceiling at ‘A’.

“South Africa is weathering the global recession and credit crunch quite well compared to its rating peers,” says Veronica Kalema, Director, Fitch’s Sovereign group. “Although GDP will fall by 1%-2% this year, this will be far less than most ‘BBB’ category sovereigns. Political risk has also eased since April’s smooth transfer of power to President Zuma. However, the post-election political landscape and its implications for policy is still unfolding, at a time when the budget deficit is rising sharply and the current account deficit, while diminished, remains large and presents continuing financing challenges.”

South Africa’s ratings have been on Negative Outlook since November 2008 when Fitch took negative rating action on a number of major emerging markets in the face of the sudden and fast deterioration of the global economic environment in the second half of last year. South Africa has been affected mainly through trade and capital flows channels; there were large portfolio outflows in Q408 and a sharp weakening of the currency. Though portfolio flows have since returned and the rand has recovered most of the ground lost since March 2009, the combined impact of global recession and a domestic cyclical downturn will be more broadly felt in 2009. Fitch’s earlier forecast of recession has been confirmed, but the agency now forecasts that GDP will contract by 1%-2% in 2009.

Revenue shortfalls mean the budget deficit could approach 6% of GDP in the current fiscal year (FY09: April 2009-March 2010) and remain high, albeit declining, in the subsequent two years. Fitch therefore expects the government debt ratio to rise from a low of 27% in FY08 to around one-third by FY10. External debt ratios are also forecast to rise as borrowing is stepped up to finance public sector investment and the current account deficit (CAD).

Several years of prudent fiscal policy give South Africa fiscal space to weather a temporary increase in the budget deficit without the debt ratio exceeding ‘BBB’ category medians. However, the increase in debt of the broader public sector, which includes non-financial public enterprises, will be much starker, as infrastructure spending is stepped up. In the longer-term, this investment will help the country ease some of the structural constraints to a higher growth potential, which will be key to improvement in the sovereign rating.

Falling inflation and slower private credit growth in response to earlier monetary tightening is also allowing a monetary stimulus. Interest rates have been reduced by 450 basis points since December. This will help support growth in H209 and into 2010. In addition, due to tighter regulation and supervision, the South African banking sector has been relatively insulated from the global credit crunch and although banking sector asset quality and profitability are worsening in the economic downturn, the sector is better placed than most “BBB” country banking sectors to support the recovery.

Some of the imbalances in the economy are starting to ease, with credit growth slowing sharply and domestic inflationary pressures abating. The CAD is also forecast by Fitch to narrow, though to a still relatively high 5%-6% of GDP. As this will not be fully covered by increased public sector borrowing and foreign direct investment, financing will still rely on portfolio flows, presenting a persistent risk to macroeconomic stability given continued volatile global risk appetite. High wage pressures also present a challenge to public finances, inflation and competitiveness.

A smooth political transition after the fourth post-apartheid general election, the most vigorously contested so far, has reduced short-term political uncertainty, strengthened democracy and should ease investor concerns as the country navigates the downturn. However, political risk has not diminished completely. Expectations have been raised and sporadic riots are a reminder that service delivery, which is a priority for the new government, has the potential to threaten political stability unless effectively addressed.

South Africa’s ratings could come under further downward pressure if economic recovery is weaker and more protracted than Fitch currently expects, leading to a worsening of key credit indicators. A weakening of the policy environment would also be ratings negative. However, if the country navigates the downturn over the next 12 to 18 months without a sharp deterioration of its credit metrics and with macroeconomic stability intact, the Outlook would be revised to Stable.

Contact: Veronica Kalema, London, Tel: +44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email:

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.”