The coronavirus pandemic is set to result in a near-doubling in external funding needs over 2020-2021 for rated high-yield sovereigns in the Middle East and Africa (MEA), says Fitch Ratings. This will largely reflect the impact of a widening of current-account deficits in many countries in the region. The volume of commercial external debt falling due will also rise gradually over 2020-2021. We believe that external financing needs among the 26 Fitch-rated high-yield sovereigns in MEA will be met largely through a combination of official borrowing and reserve drawdowns. Our expectation takes into consideration a tightening of global hard-currency funding conditions, given heightened levels of investor risk-aversion amid the pandemic. As of June 16, 2020, the IMF had announced emergency balance-of-payments support worth $11.9 billion for these sovereigns, equivalent to around 7% of our estimate of their aggregate external funding needs in 2020. The IMF is also set to provide additional funding for many countries under its more normal lending arrangements. The Fund's support will crowd-in financing from other official lenders, and could help support renewed market access, as evident from Egypt's (B+/Stable) recent Eurobond issuance. The G20's Debt Service Suspension Initiative (DSSI) on bilateral debt may also help to ease external funding pressures for a few sovereigns, such as Angola (B-/Stable). DSSI-eligible sovereigns among the 26 have around $8.1 billion in bilateral debt maturing over the full-year 2020. However, not all of this will be covered by the scheme, and a number of governments remain reluctant to participate. Large funding needs will put pressure on international reserves despite official creditors' support, particularly given the prevalence of rigid exchange-rate regimes in the region. We project reserves to fall significantly in most countries in 2020. Worst affected will be Iraq (B-/Negative), Nigeria (B/Negative), the Republic of Congo (CCC) and the Seychelles (B+/Stable), which will all experience a 30% or greater drop in reserves. Reduced reserves will offer only limited support against greater external pressures on some high-yield MEA sovereigns. We expect funding needs to exceed reserves in Ethiopia (B/Negative), Gabon (CCC) and the Republic of Congo, although the latter two are able to access reserves pooled under the Economic and Monetary Community of Central Africa (CEMAC). Ethiopia, under its recently agreed IMF program, expects to cover most of its external financing needs through official creditor support. Nigeria's and Egypt's reserves are larger relative to their funding needs. However, external liquidity strains could increase if foreign investors sell down their holdings of portfolio investment in these countries, putting pressure on ratings. We also expect Iraq's reserves will continue to provide sufficient coverage of external funding needs, despite their sharp decline. Downward pressure on reserves may be eased where exchange rates are flexible, as in Angola, Ghana (B/Stable) and Zambia (CC). However, in the near term currency depreciation may add to strains on debt sustainability, as it increases the burden of external debt repayment in local-currency terms. — SG/Fitch
