After Ghana, Tunisia most likely to default on debt: Capital Economics

A sovereign default in 2023 is looking increasingly likely in Tunisia, a London-based economic research firm has said.

“2022 will be a year to forget for most African economies – one marked by a slowdown in growth, tighter external financing conditions and balance sheet strains. This culminated in Ghana opting to default on much of its external debt earlier this week,” the Chief Emerging Markets Economist at Capital Economics, William Jackson, said.

He said while the country’s dollar bonds had rallied earlier this month on news that a staff-level agreement with the International Monetary Fund had been reached, they sold off again earlier this week following the default announcement.

Ghana’s predicament has raised the question of which (if any) African sovereign might be forced to follow in its footsteps in 2023, he said.

Jackson said, “The good news is that debt distress has become less prevalent in the region in the past few months. Out of a sample of 14 Sub-Saharan African countries, only three are currently in debt distress, based on the commonly-used threshold of dollar bond spreads exceeding 1,000bp. That’s down from a peak of eight in July.

“And those three sovereigns are Zambia and Ghana (already defaulted), as well as Ethiopia (which is seeking to restructure debts under the Common Framework). Nigeria, Kenya, Gabon, Mozambique and Angola have all slipped back under the distress threshold as global risk appetite has improved.”

He said this year has also highlighted how quickly sovereign debt problems can materialise.

“Viewed this way, it’s hardly a surprise that Ghana followed Sri Lanka into default. We think Tunisia is most likely to be next in line. Within Sub-Saharan Africa, Kenya stands out for its weak fiscal metrics. The government’s work will be cut out keeping investors on board with its fiscal consolidation plans. Otherwise, Mozambique is a point of concern,” Jackson said.

“We’re a bit less worried about Nigeria (at least in the near term) and Angola. In the former, the large share of public debt that is denominated in local currency, mitigates immediate default risks. And in the latter, high oil prices and previous austerity mean that the public debt-to-GDP ratio has declined dramatically recently. That’s likely to continue in 2023, albeit at a slower pace.”