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Africa’s hard currency sovereign debt can be a source of notable alpha generation, with the region outperforming the J.P. Morgan EMBIGD benchmark in two of the last three years.1 Its returns can be volatile as well, even before factoring in the effects of a global pandemic. With these dynamics in mind, the following takes a closer look at the underlying credit fundamentals across the region amidst an uncertain global backdrop.
Africa has weathered the Covid-19 pandemic better than expected. Deaths per million reached 1,740 in October, a fraction of those incurred Europe (14,020), the Americas (12,050) and Asia & Pacific (4,340).2 Contributing factors may include a favourable climate, younger population, and strong community-based health systems.3 While the economic impact of the pandemic has been severe, Africa’s medium-term outlook remains on par with other emerging markets, per the IMF’s latest World Economic Outlook. Five of the 16 African countries in the EMBIGD benchmark are projected to record positive GDP growth this year. While real GDP for the remaining countries, on average, is not expected to reach pre-pandemic levels until 2022, the distribution exhibits slightly favourable skew when stacked against the broader EM universe (Figure 1).
This is perhaps noteworthy given the relative magnitude of the region’s fiscal response, although there is considerable heterogeneity across the degree and type of measures enacted (Figure 2). While monetary policy has broadly eased (Figure 3), most countries operate under currency pegs or stabilized arrangements, which constrains their ability to enact conventional monetary stimulus.
Fiscal and monetary policy and the projected pace of economic recovery influence a country’s debt sustainability. Per the IMF’s forecasts, 24 of 53 non-African EMs (~45%) are expected to see debt-to-GDP increases over the next three years (Figure 4).4 In this respect, African countries fare reasonably well: six of 16 countries (~38%) are expected to see public debt increases, with half of these cases—Cote D’Ivoire, Nigeria, and Tunisia—registering an increase below three percentage points.
Even if public debt is on the right trajectory, servicing capacity bears monitoring. Figure 5 highlights forecasted interest expenses as a percent of general government revenue (excluding grants). For Ethiopia, Kenya, Namibia, South Africa, and Tunisia, this ratio is expected to steadily increase over the medium-term horizon. And while the trend is improving for Ghana, interest expense remains high. Per this metric, Africa’s servicing capacity is one of the highest amongst its regional peers.
While the general government servicing ratios in Figure 5 are elevated, the external payment schedules appear manageable, albeit wide ranging. Most countries have near-term debt service obligations of around $500 million or less, though Ghana and Egypt stick out as exceptions. More broadly, the region’s external liquidity buffers were mixed coming into the crisis, with most countries generally falling towards the bottom of their peer group across standard metrics.5 Still, any loss in FX reserves this year (Figure 6) has been mitigated, in many cases, by support from International Financial Institutions, particularly the IMF’s emergency financing programs (Figure 7).
African countries have weathered the pandemic better than initially feared, but, like the rest of the world, they have suffered economically. There is cautious optimism that the debt burden is on the right trajectory and growth will recover, but uncertainty remains elevated and external debt and liquidity metrics bear monitoring. Moreover, the region remains dependent on the global backdrop via commodity prices, advanced economies’ trade policies, and most importantly the evolution of the pandemic. Therefore, we are selectively overweight African credits where potential for alpha generation is greatest but prefer the shorter end of the asset class as we continue to monitor the region’s debt trajectory.
This material reflects the views of the authors as of November 12, 2020 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.
1 Africa and the EMBIGD returned 20.60% and 15.04% in 2019, -7.19% and -4.26% in 2018, and 13.86% and 10.26% in 2017, respectively.
2 Data retrieved from ourworldindata.org as of October 31st, 2020.
3 See BBC News, “Coronavirus in Africa: Five reasons why Covid-19 has been less deadly than elsewhere,” October 7, 2020.
4 Forecasts for 2023 are not provided for Argentina or Lebanon.
5 FX reserve coverage ratios and real effective exchange rate vs. its trailing 5-year average.
All investments involve risk, including the possible loss of capital. Past performance is not a guarantee or reliable indicator of future results. Source: PGIM Fixed Income. The information represents the views and opinions of the author, is for information purposes only, and is subject to change. The information does not constitute investment advice and should not be used as the basis for an investment decision.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
Fixed income instruments are subject to credit, market, and interest rate. Emerging market investments are subject to greater volatility and price declines.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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1042671-00001-00 Ed: 11/2020
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