A perspective on Standard & Poor's negative ratings outlook on Cape Verde government debt

Standard and Poor's (S&P) assessed a B+ rating on the long-term sovereign debt of Cape Verde since December of 2008. A year later, in December 2009, S&P posted a negative ratings outlook on Cape Verde's debt. It is instructive to understand the context of the rating's outlook, its potential impact on foreign investors, and to describe the measures that could be undertaken by the Cape Verde government to reverse this outlook.

Context of Ratings Outlook
Cape Verde has long been recognized as one of the bright economic stars in Africa. It is rated within the Top 5 of the African nations in terms of governance and sustainable economic opportunities by the independent Ibrahim Foundation. It is also among Africa's leaders in Financial Freedom as determined by the World Heritage Foundation.

The economic vitality of the nation is reflected in its strong GDP growth and relatively high per capita income in the African context. Cape Verde also withstood the global financial crisis of 2008-2009 primarily because its banks and government were not exposed to the financial instruments that were backed by real estate in foreign markets where that sector experienced major corrections. But, certainly, there were some follow through effects on the Cape Verdean economy. For example, tourism receipts and remittances from Cape Verdean expats both declined - both tourism and remittances comprise a significant component of GDP.

As a result of the global economic crisis, Cape Verde's GDP growth declined from an average of 7-8% in the years before the global economic crisis to around 4% following the crisis. Thus, there was no recession in the Cape Verde economy and growth remains strong. The outlook for growth remains positive as the country continues to experience double digit growth in the tourism sector and as remittances from Cape Verdeans increase with the recovery of the global economies. S&P itself expects economic growth to return to pre-crisis levels (S&P Sees Return to Pre-Crisis Growth for Subordinated-Saharan Africa).

Yet there are economic imbalances that are unrelated to the global crisis. In particular, there are two factors that concern S&P. The primary factor is Cape Verde's continuing reliance on government borrowing to stimulate the economy, to make public investments and to provide social benefits (such as subsidizing food and gas prices). Indeed, it was in part due to the government's counter-cyclical spending to help offset the effects of the global crisis that lead to some deterioration of the debt burden. Cape Verde's debt to GDP ratio currently runs around 75%. However, this is lower than it was a decade ago, though it represents a greater burden than the 60% ratio achieved just prior to the global shock. While the current level is among the highest in Africa, it is not expected to rise in the near term. Notwithstanding the stability of the debt-to-GDP ratio, it is too high and exposes the government to the risk of future global fiscal shocks - it is not sustainable.

The second factor that leads to the fiscal imbalances is that Cape Verde is heavily reliant on imports. The country has few natural resources with which to earn current account revenues. It attempts to extract duties and fees from these imports but such revenues are insufficient to address the current account deficit.

Click this link to find =>> S&P's Report on Sub-Saharan African Sovereigns.