African nations should borrow closer to home – AfDB
AFRICAN governments in the grip of eurobond fever should look closer to home to secure financing vital to their economic development as borrowing costs on international debt markets rise, the president of the African Development Bank (AfDB) said.
Africa has seen a boom in dollar-debt issuance over the past decade as countries have sought to borrow, often for costly infrastructure projects, at a time when investors in the US and Europe are seeking out higher yields in emerging markets.
More than 20 African nations had sold at least one eurobond, AfDB president Akinwumi Adesina said late on Friday, roughly double the number back in 2004.
“It’s all well and good when the interest rate environment is quite accommodating,” he said. “But as the Federal Reserve rates go up and you begin to see a lot more movement of money out of emerging markets, you’ll have a tightening of that capital market.”
Adesina, a former agriculture minister in Nigeria who is completing his first year as head of the Abidjan-based institution, said many African countries had ignored the potential for borrowing cheaply on domestic and regional debt markets.
Africa is also sitting atop vast unexploited capital, including $334 billion (R5 trillion) in pension funds and sovereign wealth funds worth $164bn.
Many had ignored the potential for borrowing cheaply on domestic, regional debt markets.
“These are pools of capital that need to be tapped for Africa’s development,” he said. “We’re helping countries issue bonds in domestic currencies to raise money.”
Exploiting new sources of financing is becoming more pressing due to the economic problems in Africa’s oil and mining-dependent nations brought on by the steep declines in commodities prices.
Those governments are now facing budget deficits, stagnating or contracting growth and in some cases currency depreciation that increases the cost of servicing and paying off existing dollar-denominated debt.
One such country, Ghana, issued a $750 million dollar bond earlier this month. Another, Nigeria, plans to issue a $1bn bond in December.
“There’s nothing wrong with taking debt. It really depends on how you raise it and what you raise it for,” Adesina said. “But if you are raising money simply to be able to pay back old debt, that may be an issue.”
He cited Ethiopia, Kenya, Rwanda and Ivory Coast among countries that are adeptly navigating Africa’s current economic headwinds.
“They may raise eurobonds but it’s not just that,” he said. “All these countries are investing very well in infrastructure, which is very important for boosting growth. Many of them have a very stable macroeconomic environment. Many of them are encouraging private sector investment.” – Reuters