The message to deeply indebted African nations is to stop digging
• Highly leveraged economies need to change tack and pursue stability and growth strategies
The fixed-income market is showing significant growth in sovereign debt levels — mostly in subSaharan Africa. In the recent past, several African governments have issued a flurry of foreign currency bonds, including Kenya, Nigeria, SA, Mozambique, Ivory Coast, Namibia, Rwanda, Tanzania and Angola.
Between 2010 and 2015 these countries raised $20bn in fixed-income securities.
Notwithstanding the softening of commodity prices and African countries reaching debtservice thresholds beyond which they should not borrow, these countries continue to pile on debt.
In September 2017, for example, SA issued a pair of dollar bonds worth $2.5bn, and in February 2018 Kenya issued a $2bn long-dated bond.
Those transactions were highly oversubscribed. As such, global market discussion is that a number of other African countries are buoyed by the obvious investor appetite and will be issuing hard currency bonds in 2018 to finance foreign currency commitments.
The stated purposes of these bond issuances range from investment policy to injection of foreign currency in the domestic economy, and infrastructure development. In some markets, however, cash receipts from bond sales have been looted, most recently in Mozambique, where government paper worth $2bn was sold fraudulently.
Similarly in Ghana, the proceeds from bond sales were diverted to fund recurring expenditure and the wage bill — in contrast to the prudential claims of the prospectus. Thus, within our continent, capital destruction is often accelerated by poor financial governance, lack of transparency and wanton corruption.
The analysis of the IMF’s macroeconomic data suggests that sub-Saharan African economies are accumulating debt in major part because their economic and financial fundamentals have been weakening in the past decade.
Simply put, most African countries have not fully exited the 2008-09 economic contraction and their economic performance has been sliding since. Therefore, poor economic performance is forcing almost all African economies to leverage, but this is not a sustainable strategy.
For the purposes of a nuanced analysis, macroeconomic data of nine African countries was gathered and collated. The resultant index comprises Nigeria, SA, Mozambique, Angola, Ghana, Zambia, Algeria, Egypt and Morocco.
Using a comparative analysis approach, the overall macroeconomic finding is that African economies are in the throes of a continuing downturn and that the economic situation has scarcely improved to reach pre2008-09 levels.
According to the index, the average growth rate for the cited African countries was 4.3% in 2009, but by 2016 output had contracted to 2.1%.
In 2009 the average budget balance to GDP of the countries was a 5.2% deficit, and by 2016 the deficit had widened to 5.8%. The latter reading suggests fiscal imprudence and an inability to manage budgetary constraints.
Our index further indicates that in 2009 the general government revenue to GDP was 24.2% but by 2016 this ratio had declined to 21.2%.
This ratio implies that these African states are struggling with revenue collection. In SA, for example, revenue collection has been cited as a credit rating risk by various ratings agencies.
The index further indicates that with revenue collection down, government expenditure to GDP has been reduced from 29.4% in 2009 to 27.8% in 2016. This ratio suggests a complete rejection of Keynesian thought that government spending is the fiscal option out of an economic slump.
Overall, these indicators collectively attest to poor economic performance and further explain the major reason so many African countries depend on debt. Indeed, our index shows that in 2009 average gross government debt to GDP was 32.2% but by 2016 this ratio had doubled to 60.5%.
The unfolding economic distress in the African subsector carries widespread risks, but these seem to be concealed from financial risk analysts, hence the oversubscriptions that abound in the market.
Harvard University economists Carmen Reinhart and Kenneth Rogoff showed in their seminal work This Time is Different that financial markets seldom learn from their follies, and that credit risks are seldom fully appreciated in the financial investment subsector.
Notwithstanding the refrain of the African renaissance, African economic policy thinkers appear to have failed to drive economic recovery.
Martin Wolf of the Financial Times opines that European counterparts have missed the mark as well in some respects. Granted, during the recent economic crisis creditor nations such as Germany and the UK fared better, quickly forestalling the rise in unemployment and decelerating declines in output.
In contrast, debtor countries in the eurozone experienced long delays in recovery: their economies continued to contract; unemployment grew; and competitiveness slumped.
Whatever Wolf’s impatience with eurozone policy leadership, several clear initiatives by the European Central Bank — such as asset purchases and the banking union — are now reaping dividends, whereas Africa is still anchored to the trough.
Increasing public debt levels, as is the case in most African markets, is not the answer. Instead, the solution for highly leveraged African economies is a change of course and adoption of pro-growth and stability measures. This is policy leadership, and it is complemented by adopting a proper macroeconomic strategy for recovery, anchored on investment and consumption. Resilience in the economy will be realised by investing in real assets, deceleration of rent seeking and investment prudence by the financial services sector.
SIMPLY PUT, MOST AFRICAN COUNTRIES HAVE NOT FULLY EXITED THE 2008-09 CONTRACTIONS