African default rates by rating category are similar to global sovereign default rates

There has been significant market interest in how default rates for African sovereigns compare to those for similarly-rated sovereigns in other regions, particularly as market spreads for African sovereign debt have been higher than those for other sovereigns at the same rating level. Below, we outline our review of the historical default experience which shows that default rates per rating category for African sovereign debt are similar to the default rates for the global sovereign portfolio. This evidence suggests that market spreads for African sovereigns are incorporating other considerations, in addition to the credit risk which is reflected in credit ratings. These should be a subject for further research and are not addressed here. 

A review of the historical default experience shows that default rates per rating category for African sovereign debt are similar to the default rates for the global sovereign portfolio. 

Considering the cumulative default rates for the Ba, B and Caa-C rating categories over one- to five-year horizons for the African region and globally, our data demonstrate that higher-rated government bonds

1 default less frequently than lower-rated government bonds and default rates rise sharply as we move down the rating scale (see Exhibit 1). For example, over a 12-month horizon, a B-rated sovereign bond has been 6.6 times more likely to default than a Ba-rated sovereign bond, while a Caa-C rated sovereign bond has been 5.5 times more likely to default than a B-rated sovereign bond. A Caa-C rated sovereign bond has been 35.9 times more likely to default than a Ba-rated sovereign bond. Similar rank-ordering holds for the African sovereign ratings and over longer time horizons. Thus, both the global sovereign and the African sovereign ratings have provided a reliable and significant ordering of relative default risk over the short term and over the medium to long term. 

Moreover, as Exhibit 1 shows, default rates per rating category for African sovereign bonds are similar to default rates for the global sovereign portfolio (and are also similar to global corporate default rates ). The sample size of the African rating category cohorts and the sample size of rated African defaults in the sovereign portfolio is relatively small, with only 10 rated defaults in the African region since 1983 (out of a total of 50 rated sovereign defaults). Small sample size means that small differences in default rates are not statistically significant, and also that the default rates will likely fluctuate slightly over time. Statistical robustness tests show that the differences in default rates between the African region and the global sovereign portfolio are not significant. 

The evidence suggesting that market spreads for African sovereigns are incorporating other considerations — in addition to credit risk which is reflected in credit ratings — is in line with recent findings by IMF research .

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We have published annual reports on our sovereign ratings default and recovery experience for the past twenty years. Our latest report is available here .