African Debt Loads To Grow Again

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Bruised by a significant increase in their debt, especially when denominated in local currencies, African countries seemed to heed IMF managing director Christine Lagarde’s 2014 warning, eschewing eurobond sales last year and in the first part of 2016. Ghana shocked the markets in August when it called off a long-planned $500 million eurobond issue because of its expected double-digit yields. The decision appeared wise, given the country’s rising level of debt.

“The combination of weaker growth—sub-Saharan countries saw their average growth fall to around 2% in 2016 from an average of 4.6% in the previous 20 years—and depreciated currency has generally impaired public finances with emphasis on public debt,” said Goolam Ballim, chief economist at Standard Bank in Johannesburg. “Almost universally, public debt has risen in 2016 from previous years, especially when measured as share of GDP.”

Forced toward alternative funding tools by declining multilateral economic aid, in the past 10 years Africa turned to eurobonds. In 2006 Republic of Seychelles made its debut on the international financial markets with a $200 million eurobond. It was soon followed by other sub-Saharan countries, such as Ghana, Gabon, Senegal, Nigeria, Namibia, Zambia and Rwanda. Between 2006 and 2014, African nations issued eurobonds for about $26 billion, according to the African Development Bank. These sales declined from 2015, when international investors flocked back to developed markets.

“In 2016 several countries have been postponing or suspending plans to tap the eurobond market because of prospects of unfavorable yields,” said Jacques Nel, senior economist at NKC African Economics. In May, David Lipton, deputy managing director at the IMF, reiterated Lagarde’s earlier warning against African countries’ taking on too much debt.

However, the halt in new sales of the past two years is expected to shift, as investors’ appetite for high yields returns.

“I believe that there will be an improvement in both the appetite and in the ability of the African governments to present a favorable macro perspective,” said Standard’s Ballim. “Things will start to improve, but slowly. We are not likely to see fireworks issuances.”

Bryan Carter, head of emerging markets fixed income at BNP Paribas Investment Partners, says that although more fiscal discipline would help most countries, only few small ones are really facing the possibility of default.

“We should be careful on how we paint the spectrum of countries. Some countries in Africa have been very responsible with debt: Nigeria and Uganda are great examples, as well as Ethiopia and Rwanda. These countries do not get in troubles in the period of distress,” he says. “Then there is a broad middle, countries like Ghana and Zambia. They took on debt too quickly, and when the currencies devalued, they ended up with a lot more debt, compared to the size of their economies.”

“Then there is a very small number of countries that are experiencing a shortage of dollars, that really find it difficult to pay the debt taken out,” he continues. “These tend to be very small countries, small economies with not a lot of experience in the capital markets; that is for sure the case of Mozambique.” Even in the worst case, however, these countries are so small that they would not have a systemic impact.