Africa snared in a web of eurobond debt

The 2008 economic crisis is the largest factor that has driven developing countries to seek alternative sources of finance for social and developmental infrastructure. This is because of drying up bilateral loans and grants from Europe and the United States.

Some African countries argue that funds from capital markets or sovereign bonds are a cheaper source of alternative financing. A sovereign bond is a debt security issued by a national government, called a eurobond. It is denominated in a foreign currency, usually the US dollar. Seychelles was the first sub-Saharan African country to issue a sovereign bond of $30-million in 2006.

In 2007, the Democratic Republic of the Congo (DRC) issued $454-million, Gabon $1-billion and Ghana $750-million, respectively.

Between 2010 and 2015 sub-Saharan African countries, including Côte d’Ivoire, Senegal, Angola, Nigeria, Tanzania, Namibia, Rwanda, Kenya, Ethiopia and Zambia issued sovereign bonds, raising commercial debt in excess of $19.5-billion.

Many of these eurobonds mature between 2021 and 2025, when the countries will need to repay an annual average of almost $4-billion.

But they are already bleeding a rising total of just over $1.5-billion in annual coupon payments. This represents a total of an additional $15-billion across the eurobonds’ terms. The total accumulated bonds are in excess of $24-billion. The principal amount of this is $35-billion.

The $750-million Ghana bond, with a 10-year maturity, issued in October 2007, was four times oversubscribed. The principal repayment, which kicks in in 2017, will signal the direction of the continent’s economic dynamics in the future.

Ghana has already buckled. At the end of 2015, it agreed to an International Monetary Fund (IMF) bailout, which is underpinned by austerity measures that include reviewing and streamlining tax exemptions for free-zone companies and state-owned enterprises.

A new tax policy is expected to be enacted for small businesses and a raise in value-added tax is planned.

Ghana’s financial problem was brought on by a sovereign debt crisis, rising interest costs, policy slippages and external shocks dampening the country’s medium-term prospects. The country carries a total eurobond debt of $3.53-billion on its external debt of more than $11-billion.

Its debt position of $23.38-billion represents more than 55% of gross domestic product (GDP), which teeters on unmanageability. The convergence criteria under the monetary union protocol standard for Africa says public debt shouldn’t exceed 50% of GDP in net present value.

Ghana, whose growth is driven by the exports of gold, oil and cocoa, now faces the task of managing its fiscal deficit, rising inflation, an energy deficit and reduced government revenue due to the slump in global commodity prices.

The challenge couldn’t come at a worse time. Ghana holds presidential elections in 2016. Fiscal discipline is low on the political agenda.

Before issuing the bonds, the countries carried foreign debt in bilateral and multilateral concessional loans, with average interest rates of 1.6% and maturity of 28.7 years. Financing from sovereign bonds comes at an average floating coupon rate of 6.2% with an 11.2-year maturity period. Coupon rates on these bonds recently hit record highs, reflecting deteriorating economic indicators in sub-Saharan Africa.

The Achilles heel for these countries, besides poverty, governance and political will, is their dependence on a single major export to drive the country’s economy, such as Angola (oil), Zambia (copper), Nigeria (oil), Gabon (oil) and the DRC (copper).

In 2014, IMF managing director Christine Lagarde cautioned African countries not to endanger their debt ratios by issuing sovereign bonds. And Maria Kiwanuka, former finance minister of Uganda and currently the president’s economic adviser, said African governments are pushed to take on debt at market rates despite the risk of public debt rising to unsustainable levels. Uganda is the only African country that deems eurobonds too risky. 

Says Emmanuel Mutebile, governor of the Bank of Uganda: “We shouldn’t be complacent about the dangers of big projects built on sovereign debt as it would be unwise for African countries, which will never again get debt relief. 

From what we are seeing in Ghana, we are not yet ready to issue sovereign bonds.” The first key risk factor is the cost of finance for the eurobonds. Internal analysis of the exchange rate risk must be considered, unless the country truly believes it can raise the resources for repayment of the debt from commodity export revenue.

But future indicators are ominous, showing a slowdown in demand for commodities from China, a possible increase in bond yield rates by the US, lowering oil prices and downgrading of global growth indicators. All these factors will put pressure on countries with sovereign bonds.

The second key risk is debt sustainability associated with poor management of eurobond proceeds, which end up being invested in non-income-generating social infrastructure to the extent that government cannot raise the funds to repay the loan. At least three countries — Rwanda, Gabon and Ghana — have used part of their eurobond proceeds to refinance public debt.

Countries in sub-Saharan Africa carry a vicious cycle of problems around underdeveloped economies: single-commodity exports, recurring power deficit issues, lack of fiscal discipline with budget deficits above the convergence criteria for Africa of 3% of GDP, and unending rising debt, even in times of economic growth.

The unsustainable debt of the 1980s, when Africa’s debt position stood at more than $270-billion, was attributed to poor governance, corrupt leadership and protracted civil wars in many African countries. The crossroad again is with the economic downturn and the drop of global commodity prices. These countries have come a full circle.

Sub-Saharan Africa needs political will, financial management, fiscal discipline, growth strategies, export diversification and job creation to achieve economic emancipation. The current global economic slow down will prevail for three to four more years: these countries will continue bearing rising inflation, debt repayment crises, reduction of GDP growth and fiscal challenges.

Déjà vu, Africa. We areset for troubled times. — Trevor Hambayi is a research fellow at the University of Bolton

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