In the aftermath of the 2008 financial crisis, investors were fleeing from developed economies due to an increasing awareness of a necessary investment diversification.

Africa appeared to be the next pot of gold, offering a range of business prospects with potentially high returns. African governments took advantage of the high commodity prices at that time and started issuing Eurobonds. These debt investments, usually denominated in dollars, offer flexibility and liquidity to investors willing to finance ventures in foreign countries.

The spree of borrowing was such that, by 2014, the African countries (excluding South Africa) hit a record, issuing US$ 7 billion of dollar debt. In 2015 they fell just short of that, reaching US$ 6.75 billion [1].

Exchange Rate Risks and Commodity Dependency

The fact that Eurobonds are pegged to foreign currency leave the issuing countries at the mercy of exchange rate fluctuations. The depreciation of local currencies against the dollar (Figure 1) has led to significant increases in the present nominal value of the Eurobonds, over and above the value at the time they were issued.

The plunge in commodity prices has also drained countries’ international reserves, thus reducing the stock of funds for monthly Eurobond interest payments. Most of Africa’s economies export primary commodities in raw form and the majority rely on one single commodity type as a source of government revenue and foreign exchange earnings. Between 2010 and 2013, commodities exports accounted for 34.5% of Nigeria’s GDP, 53.8% of Angola’s GDP and 12.7% of Ghana’s GDP (Figure 2)[2]. Since commodity prices are a matter of global supply and demand balance, a fall in prices results in less government revenue and foreign exchange reserves.

Figure 1 – Currency depreciation in some African countries

Figure 2 – Commodity Dependency, 2010-2013 average, as a % of GDP

Rising Government Debt

Although most of the African countries managed to decrease their relative government debt from 2006 levels (Figure 3), after 2011 the trend is again an upward one. In most oil-exporting and other resource-intensive countries in Africa, the decline in commodity revenues resulted in a particularly large increase of the government debt as a percentage of the GDP. The Republic of Congo saw its debt rise from 22.8% of GDP in 2010 to 51.5% in 2015. Gabon’s sovereign debt grew, in the same period, from 18.5% to 33.7% of GDP, while Angola saw its national debt increase from 39.8% to 47.5% of its GDP [3].

The average government debt of Sub-Saharan countries rose from 39.5% of their GPD in 2012 to 45.5% in 2015. The IMF suggests that sovereign debts above 40% of the country’s GDP in developing countries may show upon increasing risks for sustainable development[4],[5].

In addition to that, the upward trend on government debt as a percentage of GDP observed after 2011 may reflect declining GDP growth or increasing borrowings. Figure 4 shows that, after years of strong growth, the Sub-Saharan countries’ GDP growth sharply declined from 5.7% in 2012 to only 2.8% in 2015.

The current high levels of government debt, the fact that most of the countries keep borrowing in the international markets and the sudden loss of steam in the growth of most of Sub-Saharan African economies, sum to a recipe for a possible economic crisis in the not too far distant future. A continuously rising debt ratio is one of the first symptoms of unsustainable developments.

The current high levels of government debt, the fact that most of the countries keep borrowing in the international markets and the sudden loss of steam in the growth of most of Sub-Saharan African economies, sum to a recipe for a possible economic crisis in the not too far distant future. A continuously rising debt ratio is one of the first symptoms of unsustainable developments.

Figure 3 – Government Gross Debt, as a % of GDP [6]

Figure 4 – GDP Growth [7] [8]

 

Improving social-economic indicators and investing in infrastructure have to centre on policies that can avoid the issuance of new external debt. However, borrowing from domestic markets at this stage is still very limited. The domestic market for bonds is small and illiquid in most of the countries. South Africa is the only real exception in this case. Hence, if the current strategies are not revised, such as increasing fiscal cuts and decreasing imports, the continued issuing of Eurobonds appears to be the only way to cope with lower revenues and to maintain economic growth.

The main longer term risk for Sub-Saharan Eurobond issuers stems from the depreciation of their exchange rates against the USD. As all outstanding sovereign Eurobonds in the region are denominated in dollars, the depreciation of the local currency results in more money needed to pay for the debt.

Future indicators do not show any easy path to go. The slowdown of China’s economy, main importer of African commodities; a possible increase in bond yield rates by the U.S., which would make developing markets less attractive; the global oversupply of oil, which prevents its price to rise; and the downgrading of global growth indicators, are all factors that put pressure on countries that have issued sovereign bonds.

Another risk lies in the debt sustainability. For countries to be able to pay back their Eurobonds, they need to use their proceeds in high return investments. Directing these funds to projects that do not generate revenue, will only result in additional pressure when repaying the bonds.

The increased economic problems of many Sub-Saharan countries are also evident in recent rating downgrades. In November 2015, 7 out of 23 rated sovereigns in the region have been downgraded[9].

This is not the first time Africa faces a debt crisis. From 1982 to 1990, African indebtedness rose from US$ 140 billion to over US$ 270 billion. All the causes of that crisis from 30 years ago can find a parallel in current times, i.e. poor governance, rapacious and corrupt leadership, civil wars, no democratic checks and balances on government borrowing and spending, excessive population growth, the stubborn pursuit of economic policies that only contribute to the impoverishment of the population of this rich continent, thoughtless and irresponsible over-lending by private and official creditors, and the end of a commodity super cycle[10].

We are back to similar times. However, with the experience from the past, will the Africa of today be able to manage its finances and avoid a spiralling crisis? Or are we going to see a repeat of the past?

 

This article was first published on How we made it in Africa.

Published:7 October 2016

 

[1] The African Debt Crisis - Sovereign Bonds (Global Edge, Michigan State University, Apr 2016)

[2] A risky state, Commodity Dependency (The Economist, Aug 2015)

[3] Data collected from the IMF

[4] From Stimulus to Consolidation: Revenue and Expenditure Policies in Advanced and Emerging Economies (IMF, Apr 2010)

[5] Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis (IMF, Aug 2011)

[6] Data collected from the IMF

[7] Data collected from the World Bank

[8] Sudan and South Sudan experienced drastic declines in their GDP in 2011 and 2012 as a consequence of their independence. These abnormally affected the average GDP growth of the “Oil Exporters” group. For this reason, the two countries were excluded from the calculation of the average GDP growth in 2011 and 2012.

[9] African Eurobonds. Will the boom continue? (Deutsche Bank, Nov 2015)

[10] Background to the African Debt Crisis (African Debt Revisited: Procrastination or Progress? FONDAD, The Hague, 1992)

 

 

 

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