NEARLY a decade after Nelson Mandela
and anti-poverty activists Bono and Bob Geldof persuaded the rich world to
forgive Africa’s crushing debts, many countries’ debt levels are creeping up
again, which could undermine the region’s growth boom.
As African states line up to join the
growing club of dollar bond issuers, economists and analysts warn of a slide
back into indebtedness that could undo recent economic gains and create a
"Eurobond curse" to match the distorting "resource curse".
"Eurobonds have become like stock
exchanges, private jets and presidential palaces. Every African leader wants to
have one," said one investor, asking not to be named.
In 2007, Ghana became the first
African beneficiary of debt relief to tap international capital markets,
issuing a $750m 10-year Eurobond. Since then, previously debt-burdened
countries, such as Senegal, Nigeria, Zambia and Rwanda, have also put their
names on the list of bond issuers.
Governments seeking to replace
declining foreign aid and pay for infrastructure are also taking concessional
funds from multilateral institutions, more expensive commercial bank loans and
bilateral financing from lenders such as China and Brazil.
No sub-Saharan countries are in
immediate danger of default and most are largely financing themselves
domestically, but the debt build-up is stirring up troubling memories of the
past.
"The financial sector loves to
find people to prey on and their most recent prey are governments in developing
countries," Nobel prize-winning economist Joseph Stiglitz told Reuters in
an interview during a conference in Johannesburg this month.
"They get overindebted, they get
a bail-out from the World Bank and International Monetary Fund (IMF) and they
start over again. I think it’s unconscionable, but their memory is short and
their greed is large, so it’s going to happen again."
Up to 30 low-income sub-Saharan
African countries had their debts reduced under the IMF and World Bank’s Highly
Indebted Poor Countries (HIPC) initiative, which was later supplemented by the
Multilateral Debt Relief Initiative.
An estimated $100bn of debt was wiped
out, easing countries’ onerous debt burdens, often the result of loans taken on
by corrupt regimes. These had meant more being spent on debt-service payments
than on health and education combined.
Risk of over-borrowing
Although debt sustainability in Africa
has improved since the debt relief initiative, a forthcoming World Bank paper
warns of a risk of over-borrowing, especially by countries expecting new
revenues from resource discoveries. One of the co-authors of the study shared
its findings with Reuters.
In Ghana, Uganda, Mozambique, Senegal,
Niger, Malawi, Benin and Sao Tome and Principe, debt levels are creeping back
up. If all continue to borrow and grow at current rates their debt indicators
could be back to pre-relief levels within a decade.
Others with rapidly rising debt ratios
include Ethiopia, Tanzania and Burkina Faso.
Nevertheless, the study finds that on
average there has only been a modest rise in debt-to-GDP (gross domestic
product) ratios in nearly a decade.
In the 26 African HIPC beneficiaries
studied, nominal public debt fell from a GDP-weighted average of 104% of GDP
before relief, to 27% by 2006 when most had received full debt relief. Half a
decade later the ratio was at 34%. The trend has been broadly the same for
resource-rich and resource-poor, and high-and low-income economies, said Mark
Roland Thomas, a World Bank manager and co-author of the paper, the first
review of debt dynamics in Africa since debt relief.
Ghana, which sold a new $750m Eurobond
and bought back a portion of the 2017 issue last year, shows how growing debt
levels can threaten countries’ fiscal dynamics.
Ghana’s stability and roaring economic
growth, reaching 14.5% in 2011, have made it an investor favourite. But the
government’s inability to tame widening fiscal deficits has led to a
deterioration in its debt ratios. Its debt now represents just more than half
of its GDP, from 32% in 2008.
An expanding current account gap has
hit the cedi currency, which has weakened more than 9% against the dollar this
year, after a 24% slide in 2013. Fitch downgraded the cocoa, gold and oil
producer to B from B-plus last October.
In a sign of waning market confidence,
yields on Ghana’s sovereign debt are higher than for any other African country,
with an actively traded international bond at about 9% for its 2023 Eurobond
and more than 20% for domestic debt.
Zambia’s story is in some ways a
slow-motion version of Ghana’s. Africa’s biggest copper producer, which sold a
hugely oversubscribed debut $750m Eurobond in 2012 and plans to return to the
market, was also downgraded by Fitch last year.
Zambia’s debt is about 30% of GDP,
still quite low.
The government needs to spend on roads
and energy but economists worry its current pace of borrowing cannot be
sustained.
‘Eurobond curse’?
For Michael Cirami, an
emerging-markets fund manager at Eaton Vance Corp, Ghana and Zambia challenge
the notion that sustained growth is a given for African nations. While
international bonds bring countries into the global financial market and
scrutiny from investors can improve policy making, there may also be a flipside
of looser fiscal policy, he said.
"I wonder and sometimes fear
about a Eurobond curse, particularly in sub-Saharan Africa, where all of a
sudden you get what seems like a windfall of money and you end up with policy
making deteriorating," he said.
Ghana’s GDP will likely only grow by
4.8% in 2014, the IMF says, from 5.5% last year. The market has less faith than
the government that future growth will be enough to repay debtors, said Antoon
de Klerk, a fund manager at Investec.
"If Ghana’s growth falls short of
expectations, it will very quickly run into debt-servicing problems," Mr
de Klerk wrote in a note to clients.
Ghana’s finance ministry declined
comment for this story.
In Zambia, ministry of finance
permanent secretary Felix Nkulukusa told Reuters that concessional financing
from the IMF and World Bank was insufficient to fund big infrastructure
projects, forcing the country to turn to private creditors.
"The pace of borrowing is
sustainable because we are not going to be borrowing forever," he said.
The World Bank and IMF say Ghana and
Zambia’s debt is sustainable at current levels but Ghana is vulnerable to
shocks.
Tougher questions
Despite misgivings about certain
countries, Africa is still in a fundamentally different place than it was 20 or
30 years ago when the old debts were taken on, thanks to robust growth and
better public-sector management, said Todd Moss, a senior fellow at the
Washington-based Center for Global Development.
Borrowing from private creditors also
puts a higher burden on leaders to be responsible, Mr Moss said, "whereas
borrowing from the World Bank, there’s clearly a dynamic of lend and
forgive". The challenge for governments will be to ensure that borrowed
funds are invested wisely and not mismanaged.
Eurobonds may also be a short-term
funding solution for Africa as tapering of the US Federal Reserve’s bond-buying
stimulus ends an era of low interest rates in the rich world that sent
investors rushing to higher-yielding emerging markets.
Investors will do more homework on
issuers’ fundamentals than in the past and ask tougher questions about use of
funds, bankers say. A key test will be if infrastructure investments generate
returns that enable governments to service their debts.
Nick Dearden, director of the World
Development Movement, says governments should use borrowed funds to reduce
commodity dependency, still a widespread problem for Africa.
"Getting more minerals out of the
ground may be very beneficial for Western nations ... but if it’s not
developing African economies in a genuine way they’re likely to be left with
the debt and none of the resources they’ve invested in."
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