African countries saw a wave of credit rating downgrades last year with only four upgrades to their sovereign bonds, going against the global trend of net upgrades – 20 downgrades and 48 upgrades in 2023 – according to specialty re/insurance group Chaucer.
Demand for political risk insurance usually grows influenced by the downgrades of sovereign debt as it protects businesses from the risk of financially stressed countries failing to honour contracts with a business.
Over the past twelve months, African countries have accounted for 43% (15 downgrades out of 35) of global credit downgrades, according to Chaucer’s report.
Over a quarter of all downgrades of sovereign bonds (10 downgrades or 29% of the total) were in Sub-Saharan Africa alone. North Africa had five downgrades and 0 upgrades.
In addition, 43% downgrades made to sovereign bonds globally were inside Africa, while only 8% upgrades made to sovereign bonds globally were outside the continent.
Increased interest rates have pushed up borrowing costs for many African countries, while a strong dollar has also made it more expensive for them to service hard currency debt.
Higher global interest rates make it harder for governments to service their debts as they must pay higher coupons on new bonds and higher payments on index linked bonds, analysts explain.
“Many African countries are contending with a combination of external financial pressures and internal political pressures. These challenges have driven away investors with a lower risk-appetite,” said Jonathan Bint, Senior Analyst and Underwriter at Chaucer.
Adding: “The debt downgrades have also caused businesses with commercial contracts, such as infrastructure investments, to re-examine their exposure to those countries and see if they need more insurance cover to limit their downside.”
Sovereign debt downgrades often further increase the borrowing costs of a country, this could potentially lead to a downward spiral in the economy.
Civil unrest and changes of government across a number of Central African states have also contributed to the credit ratings of sovereign bonds in some countries.
With four and two downgrades, Ethiopia and Cameroon have had years of separatist conflicts, in Tigray and Ambazonia respectively. Niger (three downgrades) had a sudden change in government last year.
Countries in Western and Central Africa have undergone multiple changes of government in the past few years. Coups in Niger and Gabon have heightened fears that business assets could be expropriated.
The past year has also seen civil war erupt in Sudan, with the economic fallout impacting all its neighbours.
Bint said: “Government change creates uncertainty for businesses. This is especially true of sudden regime changes. The cancellation of contracts is one of the primary concerns businesses have with these new governments.
“Frequent changes in government drive up demand for contract frustration cover – especially in the most volatile regions.”
In comparison, the Global North fares better, with G7 countries having received only one downgrade in 2023, and the European Economic Area (EEA) and Switzerland received just two downgrades and 12 upgrades.
52 countries saw their government bonds upgraded last year, a 33% increase on the number of upgrades made in 2022/23.
Chaucer analysts noted that downgrades of sovereign debt have mainly concentrated in the Global South, with Latin America and the Caribbean accounting for more than one quarter (11 downgrades or 31% of the total) of downgrades.
Despite this, LatAm and the Caribbean saw 19 upgrades to sovereign bonds, this large number of upgrades mean the region actually netted eight sovereign debt upgrades last year, according to analysts.
The Middle East and North Africa (MENA) had seven downgrades (20% of the total).
Bint concluded: “The Global North has fared relatively well in the past year. The EEA and Switzerland have seen their sovereign bond ratings improve substantially.
“More sovereign debt downgrades present increased risk for businesses globally. Failure to protect themselves could leave businesses exposed.”
