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Africa markets at risk over slump in commodities prices, political crisis –Fitch

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International ratings agency, Fitch ratings has said Frontier Markets most especially in Africa are at risk in the last quarter of the year on the background of dwindling commodities prices and political crisis that has disrupted economy.

The agency noted that the fall in global oil prices and insecurity were the main drivers for the downward trend in frontier market sovereign ratings over the last 18 months and will remain key risks in the second half of this year.

According to Fitch report, of the 28 frontier sovereigns that are included in JP Morgan’s Next Generation Emerging Markets (NEXGEM) index, 14 have negative rating actions including downgrades or Outlook revisions since January 1, 2015, significantly outpacing the five upgrades or positive Outlook actions.

The reported stated,  “negative rating actions were in commodity-exporting countries where commodities account for at least 50per cent of current-account receipts, and where government revenues have been affected by lower commodity prices since the end of the 2003-2013 commodity boom.

“As a result, fiscal revenue has declined 50per cent or more in Angola, Gabon and Nigeria since 2013.

“Many governments have reacted with consolidation measures, including cutting capital expenditure, subsidy reforms and measures to mobilise non-commodity revenue, but these efforts have mostly fallen far short of offsetting the loss in commodity revenue.

“As a result, government debt has increased in every commodity-based emerging market. And it is higher than in pre-boom years in some frontier markets including Angola, Mozambique and Zambia. All these sovereigns have experienced negative rating actions.

“High political and security risks were a common theme for most of the other negative actions. This raises the risk of social instability and may complicate government policy making and impede progress with structural reforms.

“They also reflect corruption, government ineffectiveness and weak state institutions. These issues are not uncommon rating weaknesses amongst Fitch-rated frontier markets.

“Among the frontier markets that experienced negative rating actions over the last 18 months, Iraq is grappling with the conflict with Islamic State and a domestic political crisis, while Tunisia has felt the economic and political impact of a deteriorating security environment. Armenia’s long-running conflict with Azerbaijan has shown its potential to escalate. Political divisions in El Salvador and Costa Rica have constrained reforms,” the report by by Fitch said.

The international agency noted further that support from International Monetary Fund (IMF) for frontier markets has been evident this year, with programmes agreed for Iraq, Sri Lanka and Tunisia and programmes for others, such as Angola and Zambia, under discussion.

“This reflects the weakening economic outlook and fiscal and external position for many of these countries.

“As well as near-term financing and balance of payments support, an IMF programme may act as a policy anchor. For example, Jamaica’s upgrade reflected its good fiscal and external performance under an IMF Extended Fund Facility in place since 2013, the report added.

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