The Covid-19 pandemic will hit the world economy again, especially banking systems around the world, for at least 3 years. For Africa, six countries namely Nigeria, Tunisia, Kenya, South Africa, Morocco and Egypt will face high risks in their banking systems in the future according to S&P Global Ratings.
In its latest report dated November 17, 2020, the financial rating agency, Standard & Poor’s (S&P) identified 4 main risks that banks will face regionally and globally.
First, it is a worsening or prolongation of the effects of the pandemic on the economy. Then there are the longer-term sequelae of short-term support to banks and borrowers. Then the likely rise in debt and the number of company defaults. And finally, a development in real estate unfavorable to the credit quality of banks.
In Africa, the agency said the banking sectors of Nigeria and Tunisia will be the most vulnerable to the shock of Covid-19.
In Nigeria, the pace of the recovery of the banking sector will suffer from slow growth (GDP contraction of 3.8% in 2020 and of 2% on average in 2021-2022), a depreciation of the local currency ( naira) and volatile oil prices.
In Tunisia, the cost of risk in 2020 and more significantly in 2021-2022, will ultimately weigh on banks’ profitability.
Egypt and Kenya will be the other two countries where the banking sector will be most affected by the evolution of the pandemic.
For Egypt, the economic slowdown will lead to higher credit losses for banks. They will increase to 200 bps-240 bps in 2020-2021, due to the impact of the pandemic on private borrowers, in particular SMEs.
Kenya will see its budget deficit reach almost 8% in 2020-2021. In addition, large current account deficits will lead to a significant increase in external debt. This will entail risks for the recovery of the banking sector.
The Moroccan and South African banking systems will be the least affected among the 6 African countries mentioned above.
Morocco will experience a deterioration in the qualities of the assets of its banks, particularly in sectors such as tourism and real estate development. The Moroccan economy will contract by 5.5% in 2020 before a gradual recovery of 4.2% on average in 2021 and 2022.
As for South Africa, total private sector credit (from banks and financial markets) will contract to around 80% of GDP through 2021 (from 87% in 2019) due to the sharp economic downturn. According to SP estimates, real GDP will contract 8.2% in 2020, largely due to the impact of the pandemic, before rebounding 5% in 2021.
Meanwhile, the US rating agency has been pessimistic about the global banking sector, which could experience more difficult times in the coming years. “The recovery of banking systems around the world to pre-Covid-19 levels will be slow, uncertain and highly variable depending on geographic area,” warned Emmanuel Volland, credit analyst at S&P Global Ratings.