Africa trade treaty to have low impact on debt ratings - Fitch

 

The African Continental Free Trade Agreement (AfCFTA) will not immediately  drive credit scores for member countries,  rating firm Fitch has said. 

Even so, Fitch which last June downgraded the creditworthiness of most African countries including Kenya on Covid-19 effects on the economy believes that the continental free trade could be positive in the long run. 

''It could be credit positive in the longer term if successful trade liberalisation leads to an improved business environment more broadly and stronger economic growth in Africa,'' Fitch Ratings said in an outlook released Tuesday. 

The rating firm revised  Kenya's long-term foreign-currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'B+'.

It also downgraded the country ceiling to 'B+' from 'BB-', indicating that Kenya was vulnerable to debt default, a warning to possible creditors. 

Most African states are bogged with poor credit scores that make them unattractive to lenders . Those ready to take the risk charge higher interests. 

Although a key objective of the  AfCFTA, which came into effect on January 1 is set to reduce tariff and non-tariff barriers between African member states, driving up revenue generation, the rating firm says will not solely reduce debt default vulnerability in the continent. 

The agreement commits signatories to the phased removal of tariffs on 90 per cent of goods and provides mechanisms for the resolution of trade disputes.

It also envisages lowering of non-tariff trade barriers, liberalising trade in services, and advance mutual recognition of standards and intellectual property protection.

''The impact of trade liberalisation should be positive for the region’s economic potential, but the scale of the impact is likely to be small,'' Fitch said. 

A study published by the AU Commission and OECD in 2019 estimated that removing all tariffs on intra-African trade could boost GDP by 0.65 per cent, a figure that would rise to 3.15 per cent if all non-tariff barriers were also removed.

Increased trade integration could support manufacturing investment and productivity gains, but we would expect this impact to materialise only in the long term.

Among Fitch-rated sovereigns in Africa, the median share of exports to other African states in total 2019 exports of goods was just under 19 per cent, based on IMF data.

This is lower than in emerging Asia, a larger region, while broadly in line with trade among developing economies within Latin America or among transition economies in Europe.

It reflects in part economic specialisation in primary commodities and Africa’s small share of global GDP.

According to Fitch, the number for Africa may be distorted by the inclusion of re-exports, give the large number of landlocked countries in the continent which receive shipments via ports in neighbouring countries.

However, it does not cover informal trade, which is important in many countries. It is also not yet clear how effectively the terms of AfCFTA will be implemented or enforced.

''Governments may be unwilling to accept limitations on their ability to enact policy, particularly if trade liberalisation requires politically unpopular decisions or interferes with domestic subsidies and exchange controls,'' Fitch said. 

The rating agency further poked holes in the fragile trade agreement, pointing out possible obstacles. 

Nigeria, the continent’s largest economy, imposed an effective bar on land-border traffic for goods and persons in August 2019, shortly after signing up to AfCFTA, lifting the restrictions only in December 2020.

It says that the removal of non-tariff barriers to trade under AfCFTA is likely to lag behind the agreement’s ambitions, which may blunt its effect.

It also cited the impact of the East African Community customs union, which has been limited by a lack of integration and removal of non-tariff barriers, despite its 15-year history.

The trade bloc is also likely to face obstacles which include Infrastructure shortfalls, including poor roads and port congestion, remain a substantial challenge.

It added that a lack of reliable power supplies and constraints on access to funding will continue to curb the potential for manufacturing production.

Foreign-currency restrictions and bureaucratic impediments further hamper intra-regional trade.

''Nonetheless, there is the potential in the longer term for AfCTFA to have a positive effect on economic policies and to support growth and creditworthiness indirectly,'' Fitch said.