(The following statement was released by the rating agency)
Oct 09 - In a new report, Fitch Ratings says that the highcredit growth in sub-Saharan Africa (SSA) rated countries primarily reflects theexpansion of the financial sector from a low starting point in a context ofrapid economic development. This mitigates financial and macroeconomic risksthat are often associated with high credit expansion.
Fitch's latest Macro Prudential Risk Monitor (August 2012), which aims toidentify the build-up of potential stress in banking systems, highlighted rapidreal credit growth to the private sector in a number of SSA countries. Among the15 countries rated by Fitch in SSA, eight recorded annual real credit growthabove 15% over 2009-2011, which triggered a macro prudential index (MPI) of atleast 2 (moderate risk). These countries are Angola, Cameroon, Gabon, Kenya,Lesotho, Mozambique, Rwanda and Uganda.
Rising credit to GDP primarily reflects the expansion of the financial sectorfrom a low starting point. The SSA median credit to GDP is 21.6%, even lowerthan the 'B' median (27.7%). Credit has been growing especially rapidly incountries where private sector credit to GDP is small (eg Ghana, Angola andMozambique). Most SSA countries are low or lower-middle-income (GNI per capitabelow USD4,035) and need more, rather than less, credit to finance development.Poor access to credit is often cited as a key impediment to growth in businessconditions surveys. The main constraints to credit expansion are low incomes,informal activity and weak institutions.
On the demand side, high credit growth has been associated with high real GDPgrowth. Before 2008, countries recording the highest GDP and credit growth wereoil producers (Angola, Ghana and Nigeria), and Uganda and Zambia. Countries thathave been assigned an MPI of 2 or more are also the ones that recorded a strongrebound in GDP growth after the 2009-2010 slowdown. Ghana and Zambia, which areboth likely to record an increase in MPI from 1 to 2 at end-2012, are alsobenefiting from rapid commodity-led GDP growth.
Monetary policy has generally tightened in 2012, which should constrain creditgrowth despite limited monetary policy transmission to private sector creditconditions. Banks' lending policies have also become more conservative. The risein NPLs in 2009/10 has been the trigger for reforms of the financial sector insome countries, including better risk management in Nigeria and more stringentlending standards in South Africa. Supervision by central banks has alsoimproved following the global financial crisis.
Banks in SSA generally exhibit high capital ratios (median of 16.8% in 2011) andabundant liquidity (median loan to deposit ratio was 76.6%). Non-performingloans are contained (5.1% of total loans). Banks in SSA, with the exception ofNigeria, were resilient through the 2008/9 crisis thanks partly to limiteddirect linkages with the global economy. Cross-border liabilities are low(median of 3.6% of GDP) limiting external funding risks. The expansion offoreign banks has benefited banking operational techniques, such as loanorigination procedures, through technology transfers. The importance of foreignownership of banks (median of 64% of assets) limits the potential for contingentliabilities for the sovereign.
The analysis of potential risks is made more difficult by a lack of data onequity and house prices in a number of countries that have recorded creditgrowth above the 15% real annual threshold (Angola, Cameroon, Gabon and Rwanda).However, Fitch believes it is unlikely that those countries are facing a houseor equity price bubble given the low level of credit to the private sector andthe limited proportion of banks' credit directed towards households, especiallymortgages, which further limits potential upward pressures on property prices.
Link to Fitch Ratings' Report: Rapid Credit Growth in Sub-Saharan Africa