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2016-04-14 09:40:49
Africa discovers the downside of foreign borrowing
Apr 2nd 2016 | KAMPALA
TEN years ago African bonds were a rare sight. Of all the countries south of the Sahara, only South Africa had ever sold a dollar-denominated bond to foreign investors. Since then, 16 more have. Excluding South Africa, African countries issued $6.75 billion of dollar debt last year, just short of the record $7 billion sold in 2014. But depreciating currencies, low commodity prices and a rise in interest rates in America are taking the shine off.
Africa s bond bonanza suited both investors and governments. With government bonds in their own countries offering measly returns, rich-country pension funds looked to Africa for higher yields. And by issuing debt in dollars, African governments could avoid the double-digit rates they pay to borrow at home. For a while, optimism reigned. Ghana s debut dollar bond was four times oversubscribed. Zambia, buoyed by a copper boom, did even better: its ten-year bond, issued in 2012, was 24 times oversubscribed, and sold at a yield of 5.6% lower than the equivalent Spanish bond at the time.
Governments were able to issue bonds thanks partly to debt cancellation, which brought down external debt in the region from a peak of 76% of GDP in 1994 to 25% by 2008. Past debts were often owed to official creditors, such as the World Bank, and came with strings attached. Bond markets are less fussy, another reason governments like them. Of 30 African countries that benefited from debt relief, ten have since issued dollar bonds. Ghana, the first to do so, issued its debut bond in 2007, just a year after most of its debts were cancelled.
Africa suddenly seems less creditworthy, however. Regional growth slowed to 3.5% last year, down from 5% the year before. Cheaper commodities have hit government revenue. And the prospect of further rate increases in America is forcing emerging-market governments to pay a higher premium to attract investors. Ghana sold a 15-year bond at a yield of 10.75% in October; Zambia, Angola and Cameroon have also paid more than 9% on new issues. Continuing to borrow in dollars is a mistake, say some or madness , in the words of Tidjane Thiam, a former government minister in Ivory Coast who now heads Credit Suisse, a bank.
It is the countries with collapsing currencies that look the most foolhardy. The Zambian kwacha lost 42% of its value against the dollar last year, almost doubling the cost of servicing its debt. Ghana s debut on the bond market was accompanied by an increase in current spending, including a rise for civil servants; its debt has risen above 70% of GDP after three years of double-digit deficits. Ghana turned to the IMF a year ago, and Zambia looks likely to follow suit. Elsewhere bond issues have provoked political rows: in Kenya, opposition leaders claim some of the money raised has been stolen.
The problems are not universal. Some countries, such as Ethiopia, continue to grow strongly. The median debt-to-GDP level in the region, though rising, is only 42%. And the structure of bond repayments affords some breathing-space. Their average maturity is 11 years, so until the 2020s most countries need worry only about interest, which is fixed. The annual cost of servicing existing bonds will typically remain below 1% of GDP. There won t be a huge African debt crisis tomorrow, says Amadou Sy of the Brookings Institution, a think-tank, but now is the time for governments to get their act together.
One thing they could do is issue bonds in local currency, rather than dollars, and so eliminate the risk of fluctuating exchange rates. But foreign investors are wary of taking on that risk themselves. Most local-currency bonds are issued by just a handful of countries, distinguished by their size (Nigeria) or market development (Kenya, Ghana). Investors worry about small markets freezing up, says Stuart Culverhouse of Exotix, a brokerage that specialises in frontier markets.
Countries can build up domestic institutional investors (at present, banks buy most local bonds). Nigeria, for instance, has worked hard to reform its pension system, and pension-fund assets have grown at a rate of 25-30% over the past five years. Even so, yields on dollar debt are still much lower than domestic rates: Ghana paid 24% on a local-currency bond in November. With tax revenues falling, African governments will need to borrow from somewhere. Dollar debt will become dearer, but it won t disappear.