JEDDAH — The 2020 outlook for African banks has changed to negative from stable, underpinned by weakening operating conditions and rising asset quality pressures, Moody's said in a report published Monday. Most banks, however, will retain sound funding and liquidity and their capital buffers will be sufficient to absorb some unexpected losses, the report noted.

"Weakening operating conditions are pressuring governments' credit quality leading to a knock-on effect on banks through reduced business generation, slower credit growth and rising asset risk," said Constantinos Kypreos, Senior Vice President at Moody's.

Banks will maintain high exposures to their respective sovereigns, linking their credit profiles to those of their governments

The global economy remains sluggish with negative business sentiment and trade uncertainty clouding growth prospects. In Africa, government debt is high and GDP growth will remain below potential and insufficient to boost per capital income levels or increase economic resilience.

Asset risk will remain high, a result of rising government arrears, high loan concentrations, borrower friendly legal frameworks, and still evolving risk management and supervision capabilities. Importantly, banks will maintain high exposures to their respective sovereigns, which links and caps their credit profiles to those of their governments.

The negative outlook was prompted moreover by insufficient economic growth compounded by political and social uncertainties, the impact of trade tensions on commodity prices, and rising environmental risks.

For Moody’s rated countries, GDP growth is seen at 4.1% in 2020, below historical levels of around 6%, and insufficient to buttress per capita income levels and increase economic resilience. The external environment is becoming less predictable and subdued oil prices will weigh on oil-exporting countries. We expect the two largest economies of South Africa and Nigeria to grow by just 1.5% and 2.5% respectively.

Government debt levels have increased to around 52% of GDP, leading to government arrears and adding to vulnerabilities. Global trade tensions and their potential impact on commodity prices, as well as environmental and geopolitical risks will further constrain the business environment.

Underlying growth rates across the region will vary. Growth will remain robust in East Africa, the West African Economic and Monetary Union (WAEMU) and in Egypt – with growth rates closer to 6% – while growth in oil-exporting countries and South Africa will remain low.

The negative outlook could change to stable, however, Moody’s said, with the implementation of structural reforms and a more business-friendly environment with stronger institutions would support higher economic growth.

Further improvements in risk management, in supervision, and legal reform facilitating foreclosures and out-of-court settlements, would help reduce problem loan levels.

Concurrently, banks maintain solid funding and liquidity (including in foreign currency) and sound capital buffers.

Regional variations remain though. banks in South Africa, Nigeria, Tunisia and Angola will face the greatest challenges; Egyptian, Moroccan, Mauritian and Kenyan banks will be more resilient, the report added. — SG