The spread of the coronavirus and tumbling oil prices could trigger a capital exodus from Africa, where governments have few tools available to battle external shocks, according to Fitch Ratings.
Top oil exporters such as Nigeria especially vulnerable to the plunge in crude. The commodity lost about a quarter of its value on Monday after major producers disagreed on supply cuts to counter lower demand as the spread of the virus weighs on global commerce, Mahmoud Harb, a director at Fitch, said in a telephone interview Tuesday.
“The souring sentiment does not only affect financing in international markets, it could also lead to portfolio outflows where investors have invested in local-currency debt in countries like Nigeria, Egypt, Ghana and South Africa,” Harb said. Foreign investors have sold a net 20 billion rand ($1.2 billion) of South African government bonds this month already, according to data compiled by Bloomberg.
Unlike the previous oil rout in 2014, which pushed Nigeria and other major African economies into recession, the region has less budget room to increase spending this time around.
“Sub-Saharan African countries have limited fiscal and external buffers in the sense that they don’t have readily available assets they can use for counter-cyclical policy purposes, such as large sovereign wealth funds,” Harb said.
Crashing oil prices pose a threat to the feeble recovery in Africa’s largest economy, Nigeria. The International Monetary Fund last month cut its growth estimate for Nigeria to 2% from 2.5% on lower oil prices.
A rigid exchange rate, dwindling foreign reserves and high dependence on foreign inflows will constrain the government’s ability to deal with lower revenues, said Harb, who is the lead analyst for Nigeria.
Fitch revised Nigeria’s rating outlook to negative in December, citing the growing risk of a disorderly adjustment of the exchange rate that could stoke financial volatility and inflation. Strategists at Paris-based Societe Generale SA see a “very elevated” risk of devaluation of the naira, which has been stable over the last two years under the management of the central bank.
Harb said the rating firm is “following developments in Nigeria and possible policy announcements, but we don’t have any set calendar for the next review of rating action.”
The Nigerian government could announce measures to weather the crisis as soon as Wednesday after a ministerial committee analyzes the impact of lower oil prices.