Moody's warns that local debt markets can protect Africa from funding cuts.

Marie Diron, global head of sovereign risk at Moody's, says that African countries need to develop liquid local debt markets within their own currencies in order to protect themselves from the volatility of global markets and fickle investors.

After a series of downgrades and cuts, some credit ratings on the continent are now rising. This is due to the strain the COVID-19 pandemic has put on sovereign financial statements.

Diron noted that as geopolitical risks and trade wars roiled global markets, those countries who have increased local funding are doing the best. These include Benin and Ivory Coast.

She said in an interview at the Mo Ibrahim Foundation event in Marrakech that "domestic funding" was needed to bridge the gap.

Diron stated that the liquidity of South Africa's domestic debt markets has helped to shield its rating and borrowing costs from the turmoil caused by President Donald Trump's antagonistic approach towards President Cyril Ramaphosa and his government.

She said that reducing foreign currency exposure, increasing maturity and using revenue efficiently were all key factors in boosting the credit ratings of African countries and their market access.

Moody's Research shows that the median interest rates on local currency debts in Africa are around 12%. This compares to 8% in Latin America, and 5.5% in Asian Emerging Markets. These findings highlight cost savings African sovereigns can achieve by developing their local markets.

Diron stated that African governments were able to access more financing options in the past decade. These included the World Bank and affordable international bond markets.

Sources are now more limited and constrained, as rich nations cut aid and the concessional financing is shrinking. She said that the flow of money from China - a major source for Angola, Zambia and other countries - is now negative, as repayments are due and new lending slows.

Diron, speaking of China, said: "We are looking at a couple years where net flows will be negative because repayments will be greater."

The decline in oil prices has also affected crude exporters' revenue, particularly Angola. Diron stated that Moody's expects Brent to remain at around $65 per barrel. This is a decrease of about $10 from the previous forecast.

Diron stated that multilateral development banks were filling in gaps. However, the amounts are in the "tens and billions" but not enough to cover the $400 billion annual financing gap estimated by the African Development Bank.

Moody's also monitored any further cuts to U.S. financing

Diron said that international institutions such as the World Bank, the IMF, and the AfDB are all important.

She said: "It's a risk to conclude that multilateral banks cannot lend as much money as they do now, at a time where borrowing needs, if anything are increasing."

(source: Reuters)