Africa's two largest oil exporters, Nigeria and Angola, have little in their policymaking arsenal to limit the impact of the coronavirus pandemic on state revenues and the domestic economy, while South Africa is hampered in its own ability to use policy tools.
Expectations for a global recession have made investors more risk-averse and prompted them to withdraw money from emerging markets. This, along with deteriorating financing conditions, are pressuring emerging market currencies and widening credit spreads.
Nigeria and Angola set their 2020 budgets based on oil prices averaging $57 and $55 per barrel respectively, according to Capital Economics, but S&P Global Ratings forecasts that crude will average just $30 this year following a vertiginous price decline in recent months.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
"It has reduced their export revenues and smashed a hole in their budgets. That leaves them with very limited space to respond — essentially, they've run out of money to prop up their economies to try to tackle this crisis," said Virág Fórizs, emerging markets economist at Capital Economics in London.
On March 26, S&P Global Ratings lowered its long-term rating on Nigeria. Oil provides around 85% of Nigeria's goods exports and about half of fiscal revenue. Nigeria's current account deficit will more than double to 3.3% of GDP in 2020, while state fiscal deficits will be around 5% of GDP; funding these twin deficits is becoming trickier due to fractious global markets, so the government will have to rely on domestic sources and multilateral debt, S&P warned.
Nigeria's central bank, which in March lowered the naira's official dollar exchange rate by 15%, has announced a 1 trillion naira stimulus package to support the healthcare sector specifically and the economy more broadly, especially manufacturing and SMEs.
"Nigeria's central bank hopes these loans and financial support can help businesses muddle through these challenging times," said Fórizs.
"The financial sectors in Nigeria and Angola are really quite small and undeveloped compared with South Africa, so the types of measures Nigeria's central bank has announced have to be put in that context."
Nigeria's largest banks are Access Bank PLC, Zenith Bank PLC and FBN Holdings PLC.
Fórizs predicts that banks' nonperforming loan ratios will increase.
"As the economies slow, we could see a rise in NPLs across all industries, not just energy companies," said Fórizs. "The outlook for Angola and Nigeria is grim."
Nigeria has not yet cut interest rates. This is due to worries that lower borrowing costs would stoke inflation and hurt domestic consumption, said Lukman Otunuga, senior research analyst at FXTM in London.
"Nigeria's policymakers are in a tricky position, because they just don't have the leeway that other major economies have, so the central bank has tried to do unconventional measures like tweaking the loan-to-deposit ratio to boost liquidity and encouraging banks to lend to SMEs," said Otunuga.
On March 26, S&P Global Ratings lowered its ratings on Angola, warning the plunge in oil prices is increasing external and fiscal deficits and exacerbating funding pressures.
Angolan President João Lourenço has allowed Angola's currency to become free floating, opened up the oil sector, introduced banking sector reforms and begun a process to privatize myriad state-linked companies. Angola has received more than half of a $3.7 billion IMF loan, which is dependent on it undertaking wide-ranging neoliberal reforms.
A collapse in the kwanza prompted net government debt to soar to 114% of GDP this year from 50% in 2016, while interest payments now account for about 45% of state revenue, according to Ratings.
Oil production has steadily slumped from around 1.77 million barrels per day in mid-2016 to 1.39 million barrels a day in February 2020, which combined with the price slump has ravaged state revenue.
Pressure on the Angolan kwanza is mounting — Capital Economics forecasts the kwanza will fall another 10% in 2020 to around 600 kwanzas to the dollar, further fueling annual inflation, which was 18.4% in February.
The government on March 27 announced that Angola residents must stay at home indefinitely. At the same time, it said would cut government budget requirements by 3.17 trillion kwanzas, an amount that also includes drawing down 932 billion kwanzas from the sovereign wealth fund and raising 248 billion kwanzas from its much-touted privatization program.
Other measures within the program include reducing public investment and state spending on goods and services by 630 billion kwanzas combined. The government will also suspend payments to suppliers totaling 333 billion kwanzas, while the central bank will buy 100 billion kwanzas of government securities held by private companies.
"Buying the debt is designed to give companies some liquidity but stopping paying suppliers does just the opposite," said Carlos Rosado de Carvalho, an economics professor at Luanda's Catholic University of Angola. "The net effect of these measures is that private companies will have less liquidity. It doesn't make sense."
He believes Angola will negotiate a debt standstill with its main creditor, China.
"With oil at $30, it won't be possible to make this year's debt payments," said Carvalho.
The government has largely shut down Angola's vast informal economy, he said.
"People live day to day. They don't have a formal job," added Carvalho. "We don't have any social safety net. If this shutdown lasts for months, it will be very hard for Angolans."
In March, Moody's joined S&P Global Ratings and Fitch Ratings in downgrading South Africa. Moody's gives the country a negative outlook, noting a continuing deterioration in its fiscal strength and "structurally very weak" growth.
"Capital is heading to safe havens, but government bonds haven't reacted that much. For the most part, the downgrade has flown under the radar," said Jacques Nel, Head of Africa Macro at NKC African Economics near Cape Town.
On March 16, the South African Reserve Bank cut interest rates by 100 basis points to 5.25%. The same month, it said it would start buying government bonds in the secondary market to ease the financial sector's liquidity constraints. The central bank stressed this does not constitute quantitative easing.
"It's not an economic stimulus measure — for that, the central bank is relying more on the interest rate," said Nel. "There's still scope to reduce interest rates, so there's no need for unconventional monetary policies to boost the economy."
As of April 1, the central bank reduced banks' minimum liquidity coverage ratio to 80% from 100% previously. The LCR requirements are designed to ensure banks possess sufficient "high-quality liquid assets" which can be converted quickly into cash if needed.
South Africa's large banks include Standard Bank Group Ltd., FirstRand Ltd. and Absa Group Ltd.
S&P Global Ratings forecasts South Africa's economy will contract 2.7% in 2020. Unemployment was 28.7% at the end of 2019.
"The government was already in a precarious financial position. On the fiscal side, there's not a lot of scope to support the economy and any support measures it does take will weaken the fiscal position," Nel said. "Monetary policy can't make the structural changes to the economy which are needed to support long-term growth."
As of April 8, US$1 was equivalent to 386.01 Nigerian naira, and 536.68 Angolan kwanzas.