How healthy is Africa’s debt?

An­a­lysts cau­tion against ac­cu­mu­lat­ing too much

Africa Renewal - - Front Page - By Masimba Tafirenyika

When Uganda dropped plans last year to raise money by is­su­ing dollar-de­nom­i­nated debt, some ex­perts faulted the de­ci­sion and its tim­ing as ill-ad­vised when in­ter­est rates on global cap­i­tal mar­kets were at his­toric lows. By step­ping back, the coun­try re­sisted a trend that has grad­u­ally be­come a bond-sell­ing spree in Africa, an at­trac­tive al­ter­na­tive for get­ting money on the cheap to fi­nance cru­cial in­fra­struc­ture with less strings at­tached. And Uganda did not go qui­etly; it warned other African coun­tries to stay away from dollar-de­nom­i­nated debt be­cause if not prop­erly man­aged, it could be­come a ma­jor mill­stone when eco­nomic for­tunes change.

Ac­cord­ing to the UK-based Over­seas Devel­op­ment In­sti­tute (ODI) in a re­cent re­port on sub-Sa­ha­ran Africa sovereign bonds, the re­gion has sig­nif­i­cantly in­creased its bor­row­ing through bond sales from $6 bil­lion in 2012 to a record $11 bil­lion in 2014. This year sev­eral other coun­tries are ex­pected to tap into the mar­ket for sovereign bonds, which are debt se­cu­ri­ties is­sued by a coun­try and usu­ally de­nom­i­nated in for­eign cur­rency.

The cur­rent eco­nomic out­look of­fers sub-Sa­ha­ran Africa a chance to de­velop in­fra­struc­ture on the cheap. De­spite apprehensions over fall­ing com­mod­ity prices, most sig­nif­i­cantly oil, Africa still ranks as the sec­ond fastest-grow­ing re­gion in the world af­ter Asia. A slump in the rest of the global econ­omy ig­nited strong ap­petite among in­vestors for higher yield­ing debt out­side the tra­di­tional mar­kets of Europe and the US. The re­sul­tant re­ces­sion drove in­ter­est rates in rich coun­tries to his­toric low lev­els – even neg­a­tive in oth­ers, forc­ing in­vestors to seek prof­itable ven­tures in de­vel­op­ing coun­tries, es­pe­cially in Africa, where growth has av­er­aged 5% an­nu­ally over the past decade.

A decade ago, African coun­tries were un­able to raise money through bond sales be­cause their economies were con­sid­ered too risky by in­ter­na­tional in­vestors. Most were not even rated by credit com­pa­nies. To­day, how­ever, the quest for prof­itable in­vest­ments is be­ing pow­ered by an op­ti­mistic nar­ra­tive of Africa’s eco­nomic prospects dubbed “Africa Ris­ing”, fu­elled by high com­mod­ity prices, sound eco­nomic poli­cies and im­proved gov­er­nance. As a con­se­quence, and for the first time, sev­eral African coun­tries found them­selves el­i­gi­ble to raise money by is­su­ing bonds.

First to test the wa­ters was Sey­chelles, which in 2006 was the first in sub-Sa­ha­ran Africa, out­side South Africa, to is­sue bonds. It was quickly fol­lowed by Ghana, which raised $750 mil­lion in 2007, and later joined by sev­eral oth­ers that in­cluded Côte d’Ivoire, Nige­ria, Rwanda, Namibia, Zam­bia and most re­cently, first-time is­suers led by Ethiopia and Kenya, which in 2014 raised $1.5 bil­lion and $2 bil­lion re­spec­tively. Kenya’s en­try into the bond

$850mn bor­rowed by Mozam­bique for its na­tional fish­ing in­dus­try but in­stead spent on mil­i­tary boats and equip­ment

mar­ket in June was one of the largest ever de­but deals from an African coun­try, ac­cord­ing to the Wall Street Jour­nal. Vir­tu­ally all the bond sales were hugely over-sub­scribed, a tes­ti­mony to the in­vestors’ ap­petite for risk in fron­tier mar­kets.

De­spite the cur­rent pos­i­tive eco­nomic out­look for Africa, its debt could pose acute chal­lenges in the face of eco­nomic head­winds turned neg­a­tive from fall­ing com­mod­ity prices, a slow­ing Chi­nese econ­omy that has been gob­bling African com­modi­ties, and de­clin­ing global de­mand for ex­ports. There is grow­ing con­cern that the coun­tries likely to be hit hard­est by soar­ing debt re­pay­ments are those that cashed in on low in­ter­est rates by is­su­ing bonds. Uganda’s omi­nous warn­ing against pil­ing up debts could prove prophetic.

Al­ready, Ghana and Zam­bia have ap­pealed to the In­ter­na­tional Mon­e­tary Fund (IMF) for help in re­pay­ing debts ac­quired through sovereign bonds. De­clin­ing prices for gold and co­coa, ris­ing trade and fis­cal deficits and a bur­geon­ing debt forced Ghana to reach an agree­ment with the IMF in Fe­bru­ary for a $1 bil­lion loan. The money is ex­pected to shore up an econ­omy sad­dled with un­sus­tain­able debt lev­els of more than 60% of gross do­mes­tic prod­uct. While Ghana’s mis­for­tunes un­der­score the risks as­so­ci­ated with bor­row­ing in dol­lars, the deal with the IMF was ex­pected to re­store in­vestor con­fi­dence in what was un­til re­cently one of Africa’s high-fly­ing economies.

Zam­bia has also opened loan ne­go­ti­a­tions with the IMF af­ter it was stung by de­clin­ing prices for cop­per, its main ex­port com­mod­ity, which ac­counts for more than two-thirds of to­tal ex­port earn­ings. As if this was not enough, Zam­bia had un­wisely spent a big chunk of the money from the sovereign debt on salary in­creases for its public ser­vants. Ac­cord­ing to the ODI, Mozam­bique bor­rowed $850 mil­lion for its na­tional fish­ing in­dus­try but in­stead spent the money on mil­i­tary boats and equip­ment.

Not all debt is bad debt

De­spite Uganda’s mis­giv­ings, ac­quir­ing debt is not in­her­ently a bad pol­icy; what mat­ters is how the money is spent. Most African coun­tries that raised money from sovereign bonds have used it to pay for in­fra­struc­ture in­vest­ment like trans­port and en­ergy in Ethiopia, Rwanda, Nige­ria, Sene­gal and Zam­bia. Oth­ers, like Côte d’Ivoire and Zam­bia, used the money to pay for devel­op­ment-re­lated cur­rent ex­pen­di­tures such as health and ed­u­ca­tion. The re­cent out­break of the Ebola virus has il­lus­trated the need to in­vest in Africa’s poor health sys­tems.

There are sev­eral ad­van­tages at­tached to gov­ern­ment bor­row­ing through bond sales: they of­fer an al­ter­na­tive source of fi­nance; the money is not sub­ject to the con­di­tions usu­ally at­tached to loans from rich coun­tries or mul­ti­lat­eral or­ga­ni­za­tions; crit­i­cal in­fra­struc­ture can be fi­nanced at cheap rates gen­er­ated by re­laxed mon­e­tary poli­cies pur­sued by de­vel­oped coun­tries; and bonds carry less strin­gent terms with rea­son­able pe­ri­ods of re­pay­ment. For in­vestors, bond sales by Africa are more de­sir­able be­cause they give them the op­por­tu­nity to di­ver­sify risks and reap higher re­turns than they would get in rich coun­tries.

Po­ten­tial risks from bonds

How­ever, debt ac­quired through bond sales is a dou­ble-edged sword. To at­tract in­ter­na­tional in­vestors, the debt is is­sued in for­eign cur­rency, usu­ally in dol­lars or eu­ros. This makes the debt vul­ner­a­ble to cur­rency risks when­ever the value of the dollar or euro strength­ens. Ac­cord­ing to the ODI, sub-Sa­ha­ran Africa could face more than $10 bil­lion in losses, or 1.1% of its GDP, ser­vic­ing debt ac­quired in 2013 and 2014 should ex­change rates take a hit from a strong dollar. Fur­ther­more, debts can desta­bi­lize economies if in­vestors de­cide to re­duce their ex­po­sure to African debt, notes the ODI. Bond sales could also have neg­a­tive im­pact in terms of cost and ma­tu­rity com­pared to con­ces­sional loans from in­ter­na­tional fi­nan­cial in­sti­tu­tions.

Given the po­ten­tial risks from bonds, the cur­rent en­thu­si­asm has prompted an­a­lysts to start ques­tion­ing the wis­dom of pil­ing up dollar-de­nom­i­nated debt. A down­turn in the global econ­omy or mar­ket volatil­ity could have a neg­a­tive ef­fect on African debt, as ev­i­denced by the Ebola out­break and the plunge in oil prices. The US Fed­eral Re­serve has also sig­nalled it might end the era of rock-bot­tom in­ter­est rates, which could also spell prob­lems for African bond is­suers who will be faced with ris­ing debt re­pay­ments. Coun­tries like An­gola and Nige­ria, for in­stance, which de­pend heav­ily on oil rev­enues, are al­ready feel­ing the pinch.

IMF man­ag­ing direc­tor Christine La­garde warned African coun­tries last year against ac­cru­ing high debt. “Gov­ern­ments should be at­ten­tive and they should be cau­tious about not over­load­ing their coun­tries with too much debt,” she told the

Fi­nan­cial Times.

Thanks to pre­vi­ous mea­sures that resched­uled or can­celled Africa’s debt, ro­bust eco­nomic growth and con­ces­sional in­ter­est rates, Africa’s debt bur­den to­day is still within man­age­able range and rel­a­tively low com­pared with the strength of its economies. Hence, it’s not yet crunch time for African debtors who have taken ad­van­tage of cur­rent low in­ter­est rates and favourable mar­kets con­di­tions to is­sue bonds. Pru­dent use of the bor­rowed funds backed by sound eco­nomic poli­cies will see them weather the storm from de­clin­ing com­mod­ity prices and fu­ture in­ter­est rate hikes.

Panos/Sven Torfinn

Min­ers in a lift cage at the Cham­bishi cop­per mine in Kitwe, Zam­bia.

WB/Trevor Samson

Work­ers re­pair­ing a bar­rier on a road in South Africa.

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