B+ with a stable outlook

Global investors and multinational firms must exercise extreme caution before making investment decisions in unfamiliar markets. A ‘tool’ that tips the scales in their favour is the credit ratings issued to countries and firms by the likes of Standard and Poor’s Ratings Services (S&P). Credit ratings provide opinions about credit risk and express a specific agency’s opinion about the ability and willingness of an issuer (whether a corporation or state or city government) to meet its financial obligations in full and on time. Agencies usually have intimate knowledge of the markets they ‘rate’ in and will keep records of credit transactions spanning long periods of time. S&P publishes credit ratings on 20 sovereign nations throughout Africa with the bulk (18) falling into the Sub-saharan Africa region and the remainder in north Africa.hide“The high economic growth that we are witnessing in many Africa country markets has not resulted in improved credit quality for many of the sovereigns that we cover,” said Gardner Rusike, Associate Director: Sovereign Ratings at S&P. Mr Rusike was presenting at the agency’s 3rd Annual Spotlight on South African Insurance Seminar held in Johannesburg, 27 October 2015. Difficult market conditions have put the brakes on credit ratings improvements. From an African perspective the biggest drag on ratings include the sharp decline in oil and general commodity prices as well as the impact of post-Global Financial Crisis normalisation of US monetary policy. “As a result we have seen some weakening of the credit matrix in a number of sovereign countries,” he said. S&P’s credit matrix combines five factors that are critical in assessing a sovereign’s willingness and ability to repay its debts, including institutional and governance effectiveness and security risks; economic structure and growth prospects; external liquidity and international investment position; fiscal performance and flexibility and debt burden; and monetary flexibility. A quick glance at the changes made to ratings and outlooks over the past year confirms the impact that the lower oil price is having on African economies. “Over the past 12 months we have seen four (of seven) ratings downgrades among sovereigns that rely heavily on oil production including Nigeria, Angola, Gabon and Congo-Brazzaville,” said Mr Rusike. Nigeria has other problems too linked to the political transition taking place following that country’s recent democratic election. S&P has rated the country at B+ with a stable outlook and will monitor the region as it appoints a new cabinet and begins setting out its future economic policy. “There are a number of reforms that need to be done to improve its credit ratings matrix; but at the moment the pressures that we see are primarily related to the oil price,” he said. The credit ratings for Ghana, Mozambique and Zambia were also lowered recently due to overarching global economic pressures. On the positive side, Rwanda was upgraded early in March, primarily due to fiscal consolidation and reduced external financing risks following the restoration of global funding and access to capital markets. Tough market conditions have resulted in fewer sovereign bond issuances in 2015 and S&P expects these ‘tight’ conditions to persist through 2016. As a result the ‘yield’ on the bonds offered to African economies has deteriorated significantly from a yield of 5% at introduction in 2012 (on par with those offered to Spain) to 10% today. Despite this Zambia is in the process of issuing. Euro-bonds for the first time, accessing international markets on commercial terms. South Africa, long viewed as a powerhouse on the African continent, faces numerous challenges too. “The country is in a period of slow growth, structural current account deficits and a fiscal position which is going to be on a slow path to consolidation,” said Mr Rusike. Ironically South Africa is second only to Cape Verde at the bottom of the list of growth prospects for the 20 sovereign markets that S&P rates. The country’s Medium Term Budget Framework confirms that growth will be very low for 2015 (struggling to reach 2% of GDP) and is likely to remain subdued over the medium term. “SA faces a new normal that will affect the fiscal consolidation path, but what we are seeing at the moment is still consistent with our BBB- rating with a stable outlook,” he said. The Africa country markets rated by S&P fall into a ‘speculative investment grade’ with 15 countries on a stable outlook and five on negative. It seems counterintuitive, but the staggering short term economic growth achieved by the likes of Ethiopia (10% annually between 2013 and 2015), Mozambique (7%) and Rwanda (7%) has not translated into improved credit quality. For the most part African economies have managed to balance their current account deficits with cash inflows from commodity exports. Mr Rusike noted that the outlier in this regards is Mozambique with a deficit approaching 40% of GDP. This is due to the large investment made by that economy in the coal and gas sectors. What does the future hold? “We are still going ahead in a tough time, particularly for the oil economy,” concluded Mr Rusike. He warns that the current scenario is not similar to the once-off short term shock that the global oil market experienced in 2009, but rather a prolonged slump that will impact on the fiscal accounts and export revenues of oil-dependent nations for a number of years. Location, location, location Multinationals are divided on African challenges and opportunities. Africa offers 54 country markets so it is not surprising that firms differ on where to concentrate their investment and expansion activities. In a panel discussion on Africa growth and expansion, hosted by S&P at the 3rd Annual Spotlight on South African Insurance Seminar, it soon emerged that each insurer focused on markets that offered the best fit with group strategy. There is a growing acceptance that financial services firms are expanding into Africa due to improved trading conditions and that country destinations are being chosen for the profit opportunities on offer in increasingly competitive markets rather than for the generic ‘emerging market growth’ paradigm. Mr Sunkara Rao, CEO of GIC Re South Africa, said that west African countries such as Ghana and Nigeria offered great potential. “Nigeria is the largest economy in Africa with a massive population of English-proficient citizens who are willing to go anywhere in the world to make a living,” he said. The country also has tremendous natural resources with a significant share of global oil and gas reserves. “One of the great things about Nigeria, unlike many other countries in the region, is that they have experience of developing their own insurance market and have, over time, been able to retain some 40% of the insurance premium generated in that market,” said Mr Rao. MMI International has a presence in 12 Africa markets across a range of financial services disciplines. “We have singled out Nigeria and Kenya as top prospects for insurance,” said Mr Willem Malherbe, Head of Market Strategy and the Regional Chairman of east Africa for the firm. He said that although Nigeria’s population was more than twice that of Kenya’s their insurance markets were of a similar size. “Nigeria has roughly 15 million people that you can sell insurance to yet only two to three million buy insurance, so the challenge is to bridge the trust gap and expand our penetration into this group,” he said. Kenya meanwhile is seen by MMI as a hub for the east African market due to its relatively higher insurance penetration and the willingness of its citizens to interact with insurers online. Another major lure for insures is the business that goes hand-in-hand with infrastructure projects. It is for this reason that the likes of One Re, which has a presence in 38 Africa markets, favours countries such as Equatorial Guinea and the DRC. Mr Andrew Lewis, CEO of One RE, said that the main issue regulators had with insurers was that of reinsurance money leaving a country. “Lenders (to major infrastructure projects) are unwilling to place risks with an unrated insurance company with the result they place everything they can ‘out of country’,” he said. The insurers’ challenge therefore is to convince the international community to support local companies to build their balance sheets and insurance expertise. The payment of insurance premium was highlighted by all participants as a challenge with the consensus being that firms had to manage the process aggressively. “From an operational perspective we have found that it is a real battle to travel cross-border within regions, for example if you want to get from Kinshasa to Luanda you have to fly back into Paris first,” said Mr Lewis. The storage and transmission of data remains a concern too, with some insurers struggling to move information from their African operations to their head offices. “Connectivity is improving throughout Africa but it remains a problem for us in some of the markets,” added Mr Malherbe. MMI said that the best way to handle cross-border regulatory differences was to have strong skills on the ground in each country market. “You need people that can talk to the regulator in-country because communication with the regulator is a critical aspect for success,” he said. The availability of suitably skilled insurance personnel also presents challenges. “Although there are plenty of top level people who are prepared to relocate we struggle to find people to fill middle management (and lower) positions in-country,” concluded Mr Malherbe. “It is a perennial issue for us, you have to work out how to upskill local people and get more people into the insurance market.”

B+ with a stable outlook

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