07 July 2021: A new wave of Covid-19 infections in a number of African countries, exacerbated by the Delta variant, has increased the risk of pandemic-related setbacks for rated sovereigns in Africa, says Fitch Ratings. Slow progress on vaccination suggests that pandemic risks will persist until at least 2022.
Among Fitch-rated sovereigns in Sub-Saharan Africa (SSA), the number of confirmed infections relative to populations has risen in Lesotho, Mozambique, Namibia, Rwanda, Seychelles, South Africa, Uganda and Zambia since May, with the Delta strain already becoming dominant in some of these countries.
The region’s generally young populations do not appear to have prevented a rise in pandemic-related morbidity. However, differences are large even within sub-regions, and western Africa’s infection rates remain generally very low.
Our assumption is that governments in the continent will seek to avoid strict generalised lockdowns that ban people from moving to workplaces, although more contained measures, such as the closure of bars and restaurants in place since 28 June in South Africa, may be seen in some countries.
The capacity to enforce tougher restrictions is weak in the region, and restrictions can be unpopular. Moreover, structural factors, including low levels of technology penetration and formal employment, would impede trends that have helped to mitigate the economic impact of tough lockdowns in other regions, such as shifts to online retail and working-from-home practices.
We believe there is little likelihood of large fiscal stimulus packages in SSA, even where Covid-19 outbreaks become severe. This should cushion the impact of new infection waves from a rating perspective, but partly reflects the strained starting point of public finances in many countries.
There will nonetheless be some effects, even if the stimulus is limited. Weaker levels of economic activity may depress fiscal revenues, and expenditure may rise – for example, in South Africa, there have been calls to reopen the country’s furlough programme, the Temporary Employer/Employee Relief Scheme. There may also be some upward pressure on healthcare spending, though this is likely to be modest, not least because sectoral capacity constraints mean that there will be limits to how effectively additional funds can be spent.
The pandemic continues to pose downside risks to regional sovereign ratings, but its effects may also make external financing from bilateral and multilateral sources easier to obtain than in more normal times.
Notably, the IMF’s distribution of new special drawing rights (SDR) could ease financing for some sovereigns in the region in 2H21, and the Fund has adjusted lending conditions for countries facing pandemic-related strains. An unusually high number of sovereigns are in IMF programmes or conducting negotiations to obtain one.
Vaccination levels in Africa remain generally very low despite some recent progress. The median number of doses administered among Fitch-rated SSA sovereigns stood at around 2.6 per 100 population as of 1 July (full vaccination generally requires two doses).
The pace of vaccination may pick up from 4Q21 as vaccination programmes wind down in developed countries – assuming no boosters are required – freeing supply for elsewhere, although the low starting point in Africa suggests populations in the continent will remain vulnerable to further outbreaks well into 2022.
African sovereigns that have managed to avoid Covid-19 infection waves have still faced pandemic-related strains, notably through its earlier depressing effect on oil prices and demand in developed countries and China.
However, these effects have receded. More recently, stronger commodity prices have proved a boon for external positions in commodity exporters. For oil exporters like Angola, the associated rise in government revenues would be likely to outweigh any financial hit from new Covid-19 infections in 2021.