Money

Moody: Outlook for African Banks Stable but Risks are Still Tilted to the Downside

30/11/2018/Moody’s Investors Service

Moody’s Investors Service has changed its outlook for African banks to stable from negative reflecting the prospects of an acceleration in economic growth and stricter regulation, that will broadly offset risks relating to tightening global financial conditions and geopolitical tensions.

Moody’s forecasts that economic growth will average 3.8 percent in the African countries it currently rates in 2019, compared with an estimated 3.1 percent this year and 2.7 percent in 2017. Growth will be driven by strong domestic demand and relatively stable commodity prices, and be particularly robust in East Africa, Egypt and the West African Economic and Monetary Union (WAEMU).

“Accelerating economic growth in Africa — though still below potential — will support credit growth, while stricter regulation and better supervision will support financial stability,” said Constantinos Kypreos, a senior Vice President at Moody’s. “However, risks are still tilted to the downside given rising global interest rates, political uncertainty and increasing trade tensions.”

Rising US interest rates that lead to capital outflows across emerging markets, in conjunction with increasing government debt levels and currency depreciation, could significantly harm African banks’ loan quality and access to foreign currency funding. These pressures will be offset by resilient earnings and high local currency liquidity.

Stricter regulation and improved supervision will also help address legacy governance issues and support banks’ financial stability. Improvements include increased minimum capital requirements in Ghana and Angola, new macro-prudential limits set in Egypt and the implementation of Basel II/III capital standards in the WAEMU.

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