Welcome back and thank you for the continued support. In today’s post, we look at sovereign credit ratings downgrades for African countries the latest one being Kenya. A sovereign credit rating is when an independent organization provides an assessment on the ability of a government to repay its debt after looking at various issues such as economic growth, political stability et al. African countries have been borrowing on the Eurodollar market for the last couple of years and getting a rating becomes important to be able to access the foreign markets. Africa last year owed upwards of $100bn through Eurobonds.
The main rating agencies in the market are Moody’s, S&P, and Fitch. The rating scale ranges from “Prime” to “In default” using symbols as shown in the table below:
A country’s rating determines 3 important things:
- The interest rate they will pay
- The tenure of the loan
- Type of investors they will attract.
The higher the rating the lower the interest rate paid, the longer the tenure and the higher the chance of accessing patient capital. For example, the United States is rated AAA as the highest rating and has 10 year yields of 1.62% compared to Kenya which is rated B, and has yields of close to 8.2% a risk premium of more than 6%. Unfortunately, due to various factors most of them culminating in the lack of proper leadership, most of the African countries fall in the non-Investment highly speculative grade. What does this mean? it means most African countries will:
- Borrow expensively.
- Borrow for shorter terms.
- Be caught in a debt crisis as they must borrow more to repay debt.
- Attract high risk money that will flee at the scent of default.
Unfortunately, yet again there are upwards of 10 countries that have had their rating revised downwards, some moving from investment grade to speculative grade such as South Africa. What does this mean for these countries and you?
- Downgrades lead to an increase in the cost of refinancing, as countries will now have to borrow at higher rates
- Downgrades reduce the ability to access the Euro market
- Downgrades lead to debt distress
What is the impact of this:
- More government revenue is used for debt re-payment.
When government revenue goes into paying debt, this means:
- Less money for development which leads to stagnating economic growth
- Less money means increase in taxes as government try to increase revenues
- Less money means governments reduce hiring or even lay-off civil servants.
With the downgrades of African countries’ sovereign ratings, 2021 might be a year of slow real economic growth and reduced employment. This will lead to reduced demand and consequently, reduced business expansion. Businesses will have to cut costs, most likely employee costs, leading to larger unemployment numbers.
This is what it means when you hear of a sovereign rating downgrade in the news. Remember, this week the US nonfarm numbers come out, refer to my previous post on what these numbers mean for you https://what-does-it-mean.org/2021/03/08/us-non-farm-jobs/