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COVID-19 Exacerbates Africa's Social And Macroeconomic Vulnerabilities

More than 25 of the 54 African countries have confirmed cases of COVID-19, and the continent could find itself among the regions hardest hit. S&P Global Ratings believes African economies and the banking sector are particularly vulnerable due to the region's poorly developed health systems, its reliance on commodity exports, tourism, and remittances, as well as its significant external debt and the low creditworthiness of most African countries. Overall, the pronounced deterioration of financing conditions could hurt countries with a high current account deficit and dependence on external capital flows for financing.

We see three ways in which COVID-19 will affect African economies:

  • Commodities price channels. The economic implications of the COVID-19 are hindering growth and the prices of certain commodities.
  • Tourism flows and remittances--an important source of foreign currencies for a significant number of African countries. The impact would depend on the success in containing the new coronavirus ahead of peak tourism season, which is typically between May and September for several African countries.
  • Access to global capital markets or portfolio investment flows. This is relevant for those African sovereigns with substantial external debt or material deficits that need funding.

Poor Public Health Systems May Struggle To Contain The Disease In Africa

The continent seems ill-equipped to tackle the outbreak given its already strained health and sanitation infrastructure compared with that in other developed or emerging countries. The World Health Organization reported more than 400 cases in African countries as of March 17, 2020. Anecdotal evidence, however, suggests that the numbers might be higher or increase significantly in the near future in the absence of drastic policy measures aimed at containing the spread. We note that Ethiopia, Ghana, Kenya, Tunisia, and South Africa are among several countries that have imposed travel restrictions, banned public gatherings, and closed schools.

Oil Exporters Would Lose While Oil Importers Could Gain

Africa's oil industry is where COVID-19's dimming effect on commodities is bound to be the most evident. We revised our oil assumptions to $40 per barrel (/bbl) in 2020 from $60/bbl. Algeria, Nigeria, and Angola are likely to be the hardest hit due to the material contribution of oil to their exports. Moreover, countries where the number of infections is high or climbing-- China, Korea, Italy, France, Germany, Spain, Iran, and the U.S., among others--represent about 42% of African exports. Some of these exports will diminish because of the expected significant decline in economic growth in these countries and more generally globally (see Related Research).

Other commodities' prices did not fare better. For example, copper prices are down by approximately 15% since their peak in January, and this will weigh on Zambia's exports.

On the flip side, some African countries, such as Tunisia and Morocco, may stand to benefit from the drop in oil price, since it will create some fiscal space for them due to lower subsidies. It will also help reduce their current account deficits. It remains to be seen whether such benefit would outweigh the negative impact of the measures implemented by some countries (travel ban, social distancing, etc.) on overall economic activity.

Chart 1

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Disrupted Tourism Would Push African Countries To Seek Alternative Foreign Currency Sources

Without knowing when the new coronavirus will peak with regards to Africa's prime tourism season, there is a lot of uncertainty around the potential impact on tourism receipts and remittances, an important component of African sovereigns' balance of payment. The average contribution of tourism receipts to total exports stood at around 15% at end-2018 for countries that reported these numbers. Moreover, a sizable portion of the tourism and remittances flows to Africa is from Europe, where the disease continues to spread. The impact would depend on the region's ability to contain the virus, allowing travel and tourism flows to resume for peak season, generally between May and September. For a few African countries, tourism flows contribute to more than 50% of their exports (see chart 2). These countries would consequently have to replace these funds in order to have access to foreign currency resources. Similarly, the sharp decline in economic performance in Europe and elsewhere will also constrain remittances.

Chart 2

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A Shrinking Appetite For Riskier Instruments Will Affect African Countries With High External Debt

Until mid-February, capital markets seemed hopeful about the effects of COVID-19. That has all changed. Prices have declined sharply across most major stock exchanges. A spike in risk aversion pushed the Chicago Board Options Exchange's Volatility Index (VIX) to its highest level since 2015. Meanwhile, a flight to quality increased the price of safe-haven assets, such as high-quality bonds and reserve currencies. Spreads on lower-quality borrowers in both the sovereign and corporate spaces widened substantially. We think this will have a pronounced effect particularly on those African sovereigns that carry a significant net external debt. Tunisia, Zambia, Egypt, and South Africa, for instance, are exposed to volatility in market sentiment. This is particularly true for Tunisia, where a large portion of external debt is short term. Countries such as South Africa, Nigeria, Ivory Coast, and Benin intended to tap the capital market in 2020 but will probably have to wait now that market conditions are no longer supportive. Although lower interest rates globally may fuel investors' appetite for risky asset classes, we do not see it happening in the next few months.

Instead, we assume the multilateral lending institutions (MLIs) will have to step in and play their countercyclical role. However, there is uncertainty around how much financing MLIs could extend, especially for countries like Tunisia that have been struggling to deliver on the reform implementation under its IMF program. Positively, the IMF has made available $50 billion to assist low income and emerging markets that face disruptions related to the virus. This includes $10 billion at zero interest rate for the poorest members.

Chart 3

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Chart 4

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Chart 5

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Banks' Asset Quality Is Likely To Weaken

The new coronavirus' impact on Africa's economic growth and its banking system's asset quality indicators--from strained tourism receipts, declining remittances, lower commodities prices, weaker foreign direct investments, and more difficult financing conditions--is likely to vary. In Egypt, Tunisia, and Morocco, we expect the pressure to come from the hospitality sector due to lower tourism flows as well as significantly reduced credit volumes. Banks are already seeing lower demand for working capital lending, and corporates are curtailing their capital expenditure plans. For South Africa, the strain will mainly stem from the unsecured retail lending amid a protracted weak economic performance of the country. In Nigeria, the tension emerges from the oil sector and any potential depreciation of the Naira that might be triggered by reduced availability of foreign currency liquidity. In Morocco, lower transfers from nonresidents, which represent almost 20% of the deposit base, will also tighten banks' liquidity.

Furthermore, the evolution of COVID-19 and authorities' countermeasures will test banks' business continuity plans. The quarantine of bank staff and clients, for example, could materially hamper banks' operations, especially where customer service relies primarily on bricks-and-mortar branch networks. We think banks with strong digital distribution channels are better placed than others to continue engaging with clients. At the same time, the prevalence of online banking and arrangements for bank staff to work remotely could increase the risk of cyberattacks, in particular when such work arrangements are hastily implemented without previously tested security measures.

Related Research

  • COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
  • Stress Scenario: The Sovereigns Most Vulnerable To A COVID-19-Related Slowdown In Tourism, March 17, 2020
  • Coronavirus Impact: Key Takeaways From Our Articles, March 13, 2020
  • Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions, March 9, 2020
  • Global Credit Conditions: COVID-19's Darkening Shadow, March 3, 2020
  • Global Credit Conditions: Coronavirus Casts Shadow Over Credit Outlook, Feb. 11, 2020
  • Coronavirus To Inflict A Large, Temporary Blow To China's Economy, Feb. 7, 2020

This report does not constitute a rating action.

Primary Credit Analysts:Mohamed Damak, Dubai (971) 4-372-7153;
mohamed.damak@spglobal.com
Ravi Bhatia, London (44) 20-7176-7113;
ravi.bhatia@spglobal.com
Secondary Contacts:Tatonga G Rusike, Johannesburg (27) 11-214-4859;
tatonga.rusike@spglobal.com
Samira Mensah, Johannesburg (27) 11-214-4869;
samira.mensah@spglobal.com
Stephanie Mery, Paris (33) 1-4420-7344;
stephanie.mery@spglobal.com

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