Africa’s tick­ing time bomb: $35bn worth of Eurobond debt


The 2008 eco­nomic cri­sis is the sin­gle largest fac­tor that has driven de­vel­op­ing coun­tries to seek al­ter­na­tive sources of fi­nanc­ing for so­cial and de­vel­op­men­tal in­fra­struc­ture. This was a re­sult of the dry­ing up of bi­lat­eral loans and grants from Euro­pean and Amer­i­can coun­tries. Some African coun­tries put for­ward the ar­gu­ment that the funds from cap­i­tal mar­kets, or sovereign bonds, are a cheaper source of al­ter­na­tive fi­nanc­ing. A sovereign bond is a debt se­cu­rity is­sued by a na­tional gov­ern­ment known as a Eurobond. It is de­nom­i­nated in a for­eign cur­rency, usu­ally the dol­lar, rather than what its name (euro) im­plies.

Sey­chelles holds the dis­tinc­tion of be­ing the first sub-Sa­ha­ran African coun­try to is­sue a sovereign bond – it is­sued a US$30-mil­lion bond in 2006. This was fol­lowed by the Demo­cratic Repub­lic of Congo (DRC) is­su­ing $454-mil­lion, Gabon $1-bil­lion and Ghana $750-mil­lion in 2007.

Be­tween 2010 and 2015 at least a dozen other sub-Sa­ha­ran coun­tries, in­clud­ing Côte d’Ivoire, Sene­gal, An­gola, Nige­ria, Tan­za­nia, Namibia, Rwanda, Kenya, Ethiopia and Zam­bia is­sued sovereign bonds. They raised com­mer­cial debt in ex­cess of $19.5-bil­lion.

Many of these Eurobonds will ma­ture be­tween 2021 and 2025. It will re­quire these sub-Sa­ha­ran African coun­tries to repay an av­er­age of just un­der $4 bil­lion an­nu­ally in that pe­riod. But they are al­ready cur­rently bleed­ing a ris­ing to­tal of just over $1.5-bil­lion in an­nual coupon pay­ments on these Eurobonds.

This rep­re­sents a to­tal of an ad­di­tional $15-bil­lion across the term of the Eurobonds. The to­tal ac­cu­mu­lated bonds are in ex­cess of $24-bil­lion. The prin­ci­ple amount of this is $35 bil­lion.

The $750-mil­lion Ghana bond, with a ten-year ma­tu­rity, was is­sued in Oc­to­ber 2007 and was four times over­sub­scribed. The prin­ci­ple re­pay­ment, which kicks in in 2017, will sig­nal the di­rec­tion of the con­ti­nent’s eco­nomic dy­nam­ics in the years to fol­low. The writ­ing is al­ready on the wall. Ghana has al­ready buck­led, re­quir­ing an In­ter­na­tional Mon­e­tary Fund (IMF) fi­nan­cial re­struc­tur­ing pack­age.

Ghana’s story

At the end of 2015 Ghana agreed to an IMF bailout. It is un­der­pinned by aus­ter­ity mea­sures that in­clude re­view­ing and stream­lin­ing tax ex­emp­tions for free-zone com­pa­nies and state-owned en­ter­prises. A new tax pol­icy is ex­pected to be en­acted for small busi­nesses and a raise in value-added tax is planned.

Ghana’s fi­nan­cial prob­lem was brought on by a sovereign debt cri­sis, ris­ing in­ter­est costs, pol­icy slip­pages and ex­ter­nal shocks that have damp­ened the coun­try’s medi­umterm prospects. The coun­try car­ries a to­tal Eurobond debt of $3.53-bil­lion on its ex­ter­nal debt of more than $11-bil­lion.

Its debt po­si­tion of $23.38-bil­lion (both lo­cal and ex­ter­nal) rep­re­sents more than 55% of gross do­mes­tic prod­uct (GDP) and is tee­ter­ing on the edge of be­ing un­man­age­able. The con­ver­gence cri­te­ria un­der the mon­e­tary union pro­to­col stan­dard for Africa states that pub­lic debt should not ex­ceed 50% of GDP in net present value.

Ghana, whose growth is driven by the ex­ports of gold, oil and co­coa, now faces the daunt­ing task of man­ag­ing its fis­cal deficit, ris­ing in­fla­tion, an en­ergy deficit and re­duced gov­ern­ment rev­enue due to the slump in global com­mod­ity prices.

The chal­lenge, as in most African coun­tries, couldn’t come at a worse time. Ghana is sched­uled to hold pres­i­den­tial elections in 2016. Fis­cal dis­ci­pline will be a fac­tor of least pri­or­ity on the po­lit­i­cal agenda.

The world be­fore sovereign bonds

Prior to these coun­tries is­su­ing the bonds, they car­ried for­eign debt in the form of bi­lat­eral and mul­ti­lat­eral con­ces­sional loans. These loans car­ried an av­er­age in­ter­est rate of 1.6% and a ma­tu­rity of 28.7 years.

The fi­nanc­ing from sovereign bonds comes at an av­er­age float­ing coupon rate price of 6.2% with an 11.2-year ma­tu­rity pe­riod. In re­cent times the coupon rates on these bonds have hit record highs. This is a re­flec­tion of de­te­ri­o­rat­ing eco­nomic in­di­ca­tors among sub-Sa­ha­ran African coun­tries.

The Achilles heel for these

Warn­ing signs

In 2014 IMF Man­ag­ing Di­rec­tor Chris­tine La­garde cau­tioned African coun­tries against en­dan­ger­ing their debt ra­tios by is­su­ing sovereign bonds.

And in the same year Maria Ki­wanuka, for­mer fi­nance min­is­ter of Uganda and cur­rent eco­nomic ad­vi­sor to the pres­i­dent, al­luded to the fact that African gov­ern­ments are un­der pres­sure to take on debt at mar­ket rates de­spite the risk of pub­lic debt ris­ing to un­sus­tain­able lev­els dur­ing cur­rency de­pre­ci­a­tion and in­creas­ing bond yields.

Uganda is the only African coun­try that has spo­ken of the ac­qui­si­tion of Eurobonds as too risky for coun­tries on the con­ti­nent.

Gov­er­nor of the Bank of Uganda Em­manuel Mute­bile said: “We should not be com­pla­cent about the dan­gers of big projects built on sovereign debt be­cause it would be un­wise for African coun­tries, which will never again get debt re­lief. From what we are see­ing in Ghana, we are not yet ready to is­sue sovereign bonds.”

The risks in­volved

The cost of fi­nance for the Eurobonds is the first key risk fac­tor. In­ter­nal anal­y­sis of the ex­change rate risk must be con­sid­ered, un­less the coun­try truly be­lieves that it has the ca­pac­ity to raise the re­sources for re­pay­ment of the debt from com­mod­ity ex­port rev­enue.

But fu­ture in­di­ca­tors are all very omi­nous, show­ing a slow­down in de­mand for com­modi­ties from China, a pos­si­ble in­crease in bond yield rates by the US, low­er­ing oil prices and down­grad­ing of global growth in­di­ca­tors. All these fac­tors will put pres­sure on coun­tries that have is­sued sovereign bonds.

The sec­ond key risk in the pro­cure­ment of sovereign bonds lies in debt sus­tain­abil­ity. This is the risk as­so­ci­ated with poor man­age­ment of the pro­ceeds of the Eurobond.

They end up be­ing in­vested in non-in­come-gen­er­at­ing so­cial in­fra­struc­ture to the ex­tent that the gov­ern­ment is un­able to raise the nec­es­sary funds to repay the loan. Other than cap­i­tal in­fra­struc­ture de­vel­op­ments at least three of the coun­tries – Rwanda, Gabon and Ghana – have used part of their Eurobond pro­ceeds to re-fi­nance pub­lic debt.

Sub-Sa­ha­ran African coun­tries seem to carry a vi­cious cir­cle of prob­lems re­volv­ing around un­der­de­vel­oped economies. They os­cil­late around sin­gle-com­mod­ity ex­ports, re­cur­ring power deficit is­sues, lack of fis­cal dis­ci­pline with bud­get deficits well above the con­ver­gence cri­te­ria for Africa of 3% of GDP, and un­end­ing ris­ing debt po­si­tions even in times of good eco­nomic growth.

The cycli­cal events of un­sus­tain­able debt of the 1980s, when the con­ti­nent’s debt po­si­tion stood at more than $270 bil­lion, was at­trib­uted to – de­pend­ing on which side of the fence you’re on – poor gover­nance, cor­rupt lead­er­ship and pro­tracted civil wars in many African coun­tries.

The con­ti­nent was also un­der­go­ing rapid pop­u­la­tion growth while lack­ing any mean­ing­ful demo­cratic checks and bal­ances, and im­ple­ment­ing am­bi­tious so­cial and pub­lic growth strate­gies. The cross­road again was with the eco­nomic down­turn and the drop of global com­mod­ity prices. These coun­tries have come a full cir­cle.

Sub-Sa­ha­ran African coun­tries will re­quire strong po­lit­i­cal will, pru­dent fi­nan­cial man­age­ment, sus­tained fis­cal dis­ci­pline, long-term eco­nomic growth strate­gies, ex­port di­ver­si­fi­ca­tion and sus­tained cre­ation of em­ploy­ment to achieve eco­nomic eman­ci­pa­tion. The cur­rent global eco­nomic slow down will pre­vail for at least three to four more years.

This means that these coun­tries will con­tinue to bear ris­ing in­fla­tion, debt re­pay­ment cri­sis, re­duc­tion of GDP growth and chal­lenges with man­ag­ing their fis­cal deficits.

IMF Man­ag­ing Di­rec­tor Chris­tine La­garde. In 2014 she cau­tioned African coun­tries against en­dan­ger­ing their debt ra­tios by is­su­ing sovereign bonds.

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