South Africa and Nigeria, Africa’s largest economies, in for some real pain as investors flee

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Poor economic growth outlooks come at a price, as the two countries are this week finding out.

AFRICA’s largest two economies are paying the price for poor economic growth prospects, as Nigeria’s stocks fell to their lowest level in almost three years as investors exited, and South Africa faces a similar fate this week.

Investors in Nigeria, Africa’s largest economy, are voting with their feet due to fading hopes that President Muhammadu Buhari’s government can revive an economy growing at its slowest pace this century.

While Buhari, a 72-year-old former general who came to power in May, has prioritised stamping out corruption in Africa’s biggest economy and oil producer, investors were unnerved by a delay of more than five months in forming a cabinet, which he swore in November 11.

There’s also concern that his support for the central bank’s currency-trading restrictions are choking businesses of the crucial dollars they need to pay foreign suppliers, with further pressure expected after the country’s central bank last week cut its interest rate for the first time in six years, taking already-nervy investors by surprise.

“The government has not come up with a definitive policy for the economy,” Pabina Yinkere, an analyst at Vetiva Capital Management Ltd. told financial data company Bloomberg by phone from Lagos. “The continued lack of clarity is affecting the stock market.”

South Africa, the next largest economy - but the richest - is this week holding its breath as analysts predict that the country’s credit rating could be lowered, triggering an outflow of foreign capital and increasing the cost of sovereign borrowing as investors anticipate low economic growth.

Analysts sampled by Bloomberg overwhelmingly expect ratings company Fitch to downgrade the country’s rating to BBB- its lowest investment grade, referred to as junk status by investors, while another, Standard & Poor’s is seen holding its already low grade stable, or in a long shot, lowering its outlook to negative.

A “junk” rating by investors means the country carries a higher risk of difficulties in meeting its debt obligations and as such attracts higher penalties. Both companies will publish their reviews about the country’s credit worthiness on Friday. 

A downgrade on the sliding scale would add to the economic blues, the country in the third quarter having avoided a recession by growing an annualised 0.7%, having contracted 1.3% in the three previous months on the back of electricity shortages, low global demand and failing prices of metals stifled economic output.

Finance Minister Nhlanhla Nene cut the growth forecast for this year from 2% to 1.5% in his mid-term budget last month. Tax-revenue projections fell, forcing Nene to push out the timeline needed to lower the budget gap to 3% of gross domestic product.

Big economies often look to reduce their debt-to-GDP ratio without harming overall growth, including through reducing spending or raising taxes, but South Africa’s weakened economic growth has meant it has less space to play in as it struggles to produce enough to meet its international obligations such as paying interest.

“The rhetoric from Fitch has had a negative bias, in particular the fact that the government sort-of softened its stance on fiscal consolidation in the medium-term budget policy statement,” Carmen Nel, an economist at FirstRand Ltd.’s Rand Merchant Bank unit, told Bloomberg said by phone from Cape Town on November 25. “It is largely the combination of the fiscal position which is increasingly being compromised by the weak growth backdrop.”  

The country has the continent’s most sophisticated economy, but investors already consider South Africa almost as risky as some junk-rated countries. 

The cost of insuring against a default by the government for five years using sophisticated financial instruments that reduce risk exposure, called credit default swaps, is higher than for similarly rated Colombia, according to data from Bloomberg.

The South African contracts are also more expensive than Turkey’s and five basis points below that of Russia, which is tackling a recession, involvement in two conflicts and international sanctions linked to the fighting in Ukraine. 

But as the two economies brace for a rough ride, other economies could benefit from their pain, as specialist African funds optimistically look to other destinations such as Egypt and Kenya.

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