When commodity prices were riding high and growth rates across much of Africa were edging into double digits, governments tapped overseas debt markets for the first time with furious appetite. How times have changed.
Sovereign bond issuance across the region was down by a third in the first three quarters of 2015, after government borrowing — which accounts for the vast majority of foreign debt offerings — nearly doubled from $6bn to $11bn between 2009 and 2014.
Investor appetite at the time was high: the developed world was reeling in the aftermath of the global financial crisis and, with interest rates near zero, riskier markets were the only ones offering attractive yields.
But investors are no longer so bold, overtaken by a new mood of caution in the face of global headwinds from China, the prospect of rising interest rates in the US, and low commodity prices.
“In the near term I don’t expect the level of sovereign issuance ?to be at that of 2014, and even the first half of 2016 is unlikely to be at that level,” says Ade Adebajo, who leads client coverage for sub-Saharan Africa at UBS Investment Bank.
This does not mean that all borrowing has stopped. In October, Angola announced a maiden $1.5bn eurobond while earlier in the month Ghana, one of the most debt-laden countries in the region, issued a further $1bn.
Copper producer Zambia — the site of acrimonious debates over mine closures by the likes of Glencore — issued a bond yielding 9.8 per cent this year, up from the 5.6 per cent it paid in 2012.
Ghana’s latest issue was made at a yield of 10.75 per cent, after it failed to attract buyers with an initial offer of 9.5 per cent. On the face of it, this is cheaper than borrowing at home, where interest rates are heading towards 25 per cent. But the cedi, like other currencies in the region, has fallen sharply against the dollar, adding to the cost of overseas borrowing.
The strain is showing. In April, Ghana went to the IMF for a $918m bailout package. Opposition groups in the country claim that at least 90 per cent of government borrowing goes on current spending, rather than the productive investment most bondholders think they are buying into.
Angola, the region’s second-largest oil producer, has already borrowed $6bn from China to help pay for urbanisation and infrastructure projects. The kwanza, too, is tanking against the dollar. The days when economic growth peaked at over 22 per cent are gone.
“A lot of sovereigns are now having to repair their balance sheets. In the near to midterm, I expect there will be work to be done at the liability management level,” Mr Adebajo says.
Despite the region’s history of problems managing debt, he does not believe countries have overborrowed. He cites modest debt to GDP ratios as one indicator that, at the time of the initial glut of issuances, borrowing was in line with fiscal responsibility.
“The bigger issue is ensuring there is proper funding diversification, and an ability to tap local capital markets especially in those countries where currencies are under pressure,” he says.
“It does not mean that countries fundamentally overborrowed. It comes back to more fundamental issues about the structure of these economies.”
It is true that heavy commodity dependence, tax mobilisation ratios below 15 per cent, and the failure of some borrowers to use the funds they raise responsibly speak to ongoing structural weaknesses in many African economies.
In Kenya, for example, politicians have been unable to explain how the proceeds of a $2bn eurobond offering, supposedly destined for infrastructure projects, were actually spent. The country has one of the region’s most dynamic economies but remains beset by corruption.
It is also worth noting that one of the main factors behind the low debt levels that made the borrowing boom possible was the $76bn in debt service relief organised by the IMF and World Bank for highly indebted low-income countries just a few years before Africa’s eurobond trend took off. Thirty-three of the 40 countries in the programme were African.
The Washington-based multilateral financial institutions do not emerge as saviours. Their controversial structural adjustment programmes compounded the region’s socio-economic woes in the 1980s and 1990s. When times were good, overseas capital markets provided a promising alternative. Now they are less of an option.
Source: Financial Times
