The financial rating agency S&P Global Ratings confirmed Cape Verde’s long-term sovereign debt rating in foreign currency at “B-/B” with a stable outlook.
The agency’s analysts explain their “verdict” by the prospects for the country’s economic recovery as well as the confidence of its international partners who will continue to provide it with donations and lines of credit over the next 12 months. This support will allow the government to anticipate a possible fall in tourist flows due to inflationary pressures which affect the purchasing power of households in Europe, the leading source market for tourism to Cape Verde.
In the short term, no factor should threaten the macroeconomic balances, nor justify a revision of the sovereign rating of this country, notes S&P Global Ratings. In the medium term, on the other hand, the risk of deterioration of public finances remains high if the tourism sector does not manage to recover sustainably by 2025. Similarly, the lack of debt consolidation of public companies might lead S&P Global Ratings to reconsider its opinion.
Ratings might also come under pressure if the Cape Verdean escudo’s long-standing peg to the euro comes into question, especially as the majority of the public debt is denominated in foreign currencies and might therefore increase considerably if the local currency depreciates.
Tourists started returning to the archipelago during the 2022 season, which usually runs from December to March, thanks to a high vaccination rate. The economy rebounded 7% in 2021 following contracting 15% in 2020, largely driven by private consumption and a recovery in tourism. S&P Global Ratings analysts estimate that Cape Verde’s current account will show a deficit of 11% of GDP in 2022 and a fiscal deficit of 6% of GDP.
The country’s net public debt stock is very high, expected to stand at around 103% of GDP through 2025. This is a major constraint for sovereign ratings, analysts at the rating agency warn .
