South Africa remains the Sub-Saharan African (SSA) regions safest sovereign, according to Euromoneys country risk survey (ECR), but Botswana might be about to overtake the regions star performer if recent trends persist. And Namibia and Ghana are also worth watching.
Since 1993, when Euromoney began compiling its country risk rankings biannually, South Africa has had two main spells as the SSA regions star performer, including since 2009. The most prosperous country in the region, South Africas strong institutions, and large and liquid financial sector, means it is the top-ranked sovereign in the region for bank stability, government payments/capital repatriation, and access to capital, while regularly ranking in the top five SSA countries on a range of other ECR sub-indicators.
However, South Africas regional dominance from a country risk perspective appears to be waning. And there is historical precedent. In 1993, the countrys ECR score was 8.6 points higher than second-placed Botswana. The scores later converged and, for almost the entire period between September 2001 and September 2009, Botswana ranked above South Africa. The margin is once again shrinking it is just 2.1 points, signalling the possibility of another seismic shift.
South Africas ECR profile has been hampered by a range of internal issues. The country is struggling to grow as fast as some of its other compatriots in the region, affected in part by structural constraints and political divisions over economic policy, while its current account deficit is widening and foreign debt rising though with little indication of any debt-servicing difficulties.
Furthermore, while South Africa and Botswana have seen their ECR scores decline moderately since the first quarter reflecting deterioration in global growth prospects linked to the eurozone crisis and its impact on commodity prices South Africas score has fallen slightly more than Botswanas.
In part, this reflects political uncertainty attached to the African National Congress leadership race ahead of elections to be held in 2014, and will have implications for how to address the high unemployment and social disparities that exist in the country. South Africas ECR political assessment is still just keeping ahead of Botswanas, but by only one point and it has been slipping this year. Its government stability score is lower than that for China, Brazil and Russia.
Botswana ranks higher on several other components of the ECR scores relative to South Africa, notably for its employment outlook, institutional risk and corruption rankings. With regard to the latter, the ECR result mirrors Transparency Internationals latest (2011) Corruption Perceptions Index, which also places Botswana at 32 out of 183 countries worldwide above South Africa in 64th position.
Where does Botswana beat South Africa?
Source: Euromoney Country Risk
However, the regulatory environment is still more favourable in South Africa, according to the World Banks annual Doing Business report, where better credit access and investor protection are among the highlights. Indeed, this is reflected in our own survey, where South Africa scores 6.2 for its regulatory and policy environment, compared with 5.1 for Botswana.
And closing the gap with South Africa ... may be more attributable to negative sentiment surrounding South Africa, and affecting its own reputation, than merely a positive view on Botswana, according to Mike Davies, associate director and head of Africa at Maplecroft, and a member of ECRs expert panel. Nevertheless, it might not be long before Botswana becomes the top-rated sovereign in the region if recent trends persist.
Botswanas economic miracle
Botswana, often referred to as one of Africas success stories, has a higher GDP per capita than South Africa albeit with a fraction of its population. The country remains largely dependent on the proceeds of diamond mining for its prosperity, although diversification into manufacturing, construction and services in recent years is helping to gradually reduce the economic dominance of this precious commodity.
Unemployment, income inequalities and poverty levels are also uncomfortably high, and inflation is above the Bank of Botswanas (central banks) 3% to 6% medium-term target, but is falling back toward that range. It scores well relative to South Africa in pure economic terms.
Positively, economic growth is not predicted to fall sharply in Botswana in spite of the budget consolidation now taking place in the wake of the extraordinary fiscal stimulus needed to support the economy after the global financial crisis struck in 2008.
The latest African Economic Outlook, an annual report produced jointly by the African Development Bank and the Organization for Economic Cooperation and Development, predicts 4.8% real GDP growth for Botswana in 2012 (down from 6.4% in 2011), before it accelerates to 6.7% in 2013.
The forecasts for South Africa are much lower at 2.8% for 2012 and 3.6% in 2013. Botswanas economic-GNP score in ECRs country risk rankings just pips South Africas, reflecting these differences.
The completion of large infrastructure projects, and wider concerns surrounding the health of the global economy and its impact on minerals demand, could nonetheless weigh more heavily on the regional economic outlook in the short term.
Encouragingly, Botswanas government appears committed to achieving a small budget surplus during the current fiscal year 2012/13, as well as improving financial intermediation and regulation, amid a relatively low level of external debt and a current account that is moving from deficit into surplus, helping to shield the country from rising external winds.
Closing the gap
While South Africa and Botswana are established within the third tier of ECRs five-tier ranking system denoted orange on our Country Risk Scores Map the region contains mostly tier-five (highest-risk) countries and a handful denoted as tier-four, all lying along the west coast: Angola, Gabon, Ghana, Namibia and Nigeria.
Of that group, Namibia ranks the highest, in third position regionally and at 75th overall in the global rankings. It is another country closing the gap with South Africa, although the bridge remains wide.
Taking advantage of positive investor sentiment toward SSAs emerging sovereigns, Namibia launched its first sovereign bond in October a $500 million, 10-year Eurobond placement in the wake of a handful of debut listings by other SSA sovereigns.
We noted at the time (Namibia receives improved scores for sovereign risk) that in Euromoneys survey of country risk ... Namibia scores well ahead of other African Eurobond issuers such as Nigeria, Gabon and Ghana.
The bond was five-and-a-half times oversubscribed, signalling appetite for more bond placements, and its success was rewarded by being voted Euromoneys Middle East and Africa Deal of the Year 2011. As we pointed out at the time, critics argued that ... [the] bond was too cheap for one of SSAs few investment grade countries. But we also noted this could be blamed on the gloomy world outlook.
This increased borrowing has boosted Namibias total external debt burden from 3.4% of GDP to 8% of GDP, according to the Bank of Namibia (central bank). However, this, and the countrys total debt burden rising to around 26% of GDP remain below at-risk thresholds defined by the International Monetary Fund. There is, therefore, room for the increased domestic and external financing requirements to support the fiscal expansion necessary to support growth and jobs creation.
As in other countries, economic growth decelerated in Namibia last year in response to flooding in the north, affecting agricultural production, softer minerals demand and strike action disrupting manufacturing. These sectors, in conjunction with high levels of construction, are expected to support economic activity during the medium term, although risks are still attached to a sharp downturn in the global economy.
Ghana: still in its infancy
Meanwhile, Ghana, the fourth-ranked SSA sovereign in ECRs country risk rankings, has retained its regional position despite falling seven places in the global rankings since March to 84th. During the past decade, the countrys political and economic development has greatly improved its standing in the region as one of the less-risky SSA sovereigns.
The countrys economic-growth prospects are among the strongest in the region, with real GDP predicted to rise by 6% to 7% in 2012-13. However, the main sources of this strong growth oil, cocoa and gold production are a risk should commodity prices recede.
Most of Ghanas sub-indicators in ECRs country risk scores are below South Africas and Botswanas. However, its economic-GNP score exceeds the scores for South Africa and Botswana, and its score for employment/unemployment also exceeds South Africas, while on a par with Botswanas.
With presidential and parliamentary elections scheduled for December, there will be intense pressure for public sector pay rises and other spending increases, which might counteract the recent narrowing of the budget deficit to 4.3% of GDP.
This article was originally published by Euromoney Country Risk.