Africa rush to Eurobond issuance raises spectre of new debt relief
- By: Angus Downie | Financial Times
- Apr 15, 2015
- 4 min read
The rush by African sovereigns to issue in the Eurobond market is creating problems. When interest rates in the US eventually rise, the burden of servicing new Eurobond interest payments will also rise. Any new issuance will also likely be priced higher. Adding to the burden of higher debt servicing costs, the low oil and commodity price environment is reducing export revenues – the very revenues that sovereigns need to service debt.
Some sovereigns (and possibly some corporates) could struggle to meet private creditor debt service payments, which would increase roll-over risk, ushering in a new era of debt relief.
Look back 10 years or more and images of “Live 8” and “Drop the Debt” (part of the Jubilee 2000 campaign) come to mind. Fast forward to 2015 and while debt distress for Middle Africa is not a hot topic, there are increasing concerns about debt sustainability in some countries.
Just look at the eurozone for a reminder of how high and unsustainable debt stocks, allied with large fiscal deficits,have placed virtually unmanageable strains on governments and their citizens. While Africa is undoubtedly in better shape than it was in the early 2000s, it could be wise to pause and consider where countries are heading.
Under the Highly Indebted Poor Countries (HIPC) Initiative, the subsequent Multilateral Debt Relief Initiative (MDRI), and London Club agreements, some 36 countries (mostly African) have benefited from around US$100bn in debt reduction packages to ensure that “that no poor country faces a debt burden it cannot manage”. New borrowing is encouraged (along with grants instead of loans to poorer, riskier countries), but on a “responsible” basis, given that Africa needs to invest US$360bn on infrastructure alone over the next 25 years according to the African Development Bank.
HIPC and MDRI debt relief have helped ensure sub-Sahara Africa’s gross government debt, in aggregate, has remained relatively stable since the global crisis at around 29-30 per cent of aggregate GDP. Moreover, recent revisions to GDP that have increased the size of some economies (such as Nigeria, Ghana and Kenya) have helped lower debt-to-GDP ratios. However, debt is starting to creep up and the post-global crisis stability masks large swings in countries such as Ghana (despite the benefit of its GDP revision), South Africa, and Kenya.
Source: Ecobank
Some of the increase is due to domestic debt issuance, but non-concessional, external borrowing has become a significant driving force in recent years, with access to the Eurobond market supported by ultra-low interest rates in the US. While borrowing at commercial terms has helped some of Africa’s larger economies diversify their sources of funding, which is a good move, it has not always been supported by the IMF, which in May 2014 advised against borrowing too much of this type of debt. Nearly one year on, this advice has gone unheeded as Côte d’Ivoire, Ethiopia, Ghana, Kenya and Senegal have all successfully issued a large amount of Eurobond debt.
In addition to concerns over the growth in external, private sector debt stocks, there is concern that some African governments’ ability to manage this new type of debt has become stretched. African sovereigns have long-standing relationships with concessional debt issuers, which are framed by lengthy discussions over borrowing requirements, project viability, development impact, and debt sustainability (largely driven by donors).
By contrast, Eurobond debt is contracted quickly, with few questions asked about what it will be spent on, and with relatively short repayment terms (generally five to 10 years compared to concessional debt that can be stretched out over 30 years or more at very low interest rates and often with a five year grace period).
Some fear that the slow, ponderous public sector debt framework is starting to be replaced with a rapid, superficial analysis, creating complexities that some African sovereigns may struggle to manage. Others point to the need to keep markets “on-side” as a means to mitigate roll-over risk, compared to the “lend-and-forgive” attitude that multi and bilateral lenders have displayed in the past.
Another aspect of managing external debt is the exchange rate risk that is embedded within it. While servicing Eurobond (and other private sector) debt is currently attractive, particularly when compared to local borrowing costs that can be up to 20 per cent or more for five years, the impact of US dollar strengthening is already undermining many African currencies. Coupled with the weak outlook for many commodity prices, in part caused by US dollar strengthening, the double-whammy facing African currencies this year and beyond is a major concern.
But it’s not all doom and gloom. Some countries have managed to maintain stable debt ratios and have utilised borrowed funds productively. They have also invested in infrastructure that will help boost output for many years, and in export sectors that will support increased revenues that in turn will help meet US dollar debt service commitments.
The creation of Debt Management Offices is another positive step, which has helped professionalise governments’ handling and management of debt. Finally, increased efforts have been made to boost tax collection, which is essential for all governments across Africa given the great demand for government spending – whether on provision of essential services or debt servicing.
Source: ft.com
By: Angus Downie (Angus is head of economic research, Ecobank )
