In the aftermath of the 2008 financial crisis, investors fled developed economies, growing increasingly aware of the necessity of investment diversification. Africa appeared to be the next pot of gold, offering a range of business prospects with potentially high returns. African governments took advantage of the high commodity prices at that time and started issuing Eurobonds. These debt investments, usually denominated in dollars, offer flexibility and liquidity to investors willing to finance ventures in foreign countries.
The spree of borrowing was such that, by 2014, African countries (excluding South Africa) hit a record, issuing combined US$7bn of dollar debt. In 2015 they fell just short of that, reaching $6.75bn.
Exchange rate risks and commodity dependency
The fact that Eurobonds are pegged to foreign currency leaves the issuing countries at the mercy of exchange rate fluctuations. The depreciation of local currencies against the dollar (see graph below) has led to significant increases in the present nominal value of the Eurobonds, over and above the value at the time they were issued.
The plunge in commodity prices has also drained countries’ international reserves, thus reducing the stock of funds for monthly Eurobond interest payments. Most of Africa’s economies export primary commodities in raw form and the majority rely on a single commodity type as a source of government revenue and foreign-exchange earnings. Between 2010 and 2013, commodities exports accounted for 34.5% of Nigeria’s GDP, 53.8% of Angola’s GDP and 12.7% of Ghana’s GDP. Since commodity prices are a matter of global supply and demand balance, a fall in prices results in less government revenue and lower foreign exchange reserves.
Rising government debt
Although most African countries managed to decrease their relative government debt from 2006 levels (see graph below), after 2011 the trend is again an upward one. In most oil-exporting and other resource-intensive countries in Africa, the decline in commodity revenues resulted in a particularly large increase of government debt as a percentage of the GDP. The Republic of Congo saw its debt rise from 22.8% of GDP in 2010 to 51.5% in 2015. Gabon’s sovereign debt grew, in the same period, from 18.5% to 33.7% of GDP, while Angola saw its national debt increase from 39.8% to 47.5% of its GDP, according to IMF data.
The average government debt of sub-Saharan countries rose from 39.5% of their GDP in 2012 to 45.5% in 2015. The IMF suggests that sovereign debts above 40% of the country’s GDP in developing countries may increase chances against sustainable development.
In addition to that, the upward trend on government debt as a percentage of GDP, observed after 2011, may reflect declining GDP growth or increasing borrowings. The below graph shows that, after years of strong growth, the sub-Saharan countries’ GDP growth sharply declined from 5.7% in 2012 to only 2.8% in 2015.
The current high levels of government debt; the fact that most of the countries keep borrowing in the international markets; and the sudden loss of steam in the growth of most of sub-Saharan African economies, are recipe for a possible economic crisis, in the not too-distant future. A continuously rising debt ratio is one of the first symptoms of unsustainable developments.
A full cycle
Improving social-economic indicators and investing in infrastructure have to centre on policies that can avoid the issuance of new external debt. However, borrowing from domestic markets is still limited. The domestic market for bonds is small and illiquid in most countries. South Africa is the only real exception in this case.
If the current strategies are not revised – new measures could include to increasing fiscal cuts and decreasing imports – the continued issuing of Eurobonds appears to be the only way to cope with lower revenues and maintain economic growth.
The main longer term risk for sub-Saharan Eurobond issuers stems from the depreciation of their exchange rates against the dollar. As all outstanding sovereign Eurobonds in the region are denominated in dollars, the depreciation of the local currency results in more money needed to pay for the debt.
Future indicators don’t reveal any easy escape routes. The slowdown of the economy of China, the main importer of African commodities; a possible increase in bond yield rates by the US, which would make developing markets less attractive; the global oversupply of oil, which stops its price rising; and the downgrading of global growth indicators, are all factors that put pressure on countries that have issued sovereign bonds.
Another risk lies in debt sustainability. For countries to be able to pay back their Eurobonds, they need to use their proceeds in high-return investments. Directing these funds to projects that do not generate revenue will only result in additional pressure when repaying the bonds.
The increased economic problems of many sub-Saharan countries are also evident in recent ratings downgrades. In November 2015, 7 out of 23 rated sovereigns in the region had been downgraded.
This is not the first time Africa faces a debt crisis. From 1982 to 1990, African indebtedness rose from $140bn to over $270bn. All the causes of that crisis from 30 years ago can find a parallel in current times. These causes included, according to the Hague’s Forum on Debt and Development, poor governance; rapacious and corrupt leadership; civil wars; no democratic checks and balances on government borrowing and spending; excessive population growth; the stubborn pursuit of economic policies that contribute to the impoverishment of the population of a rich continent; thoughtless and irresponsible over-lending by private and official creditors; and the end of a commodity super cycle.
We are back to similar times. However, with the experience from the past, will the Africa of today be able to manage its finances and avoid a spiralling crisis? Or are we going to see a repeat of the past?
Otavio Veras is a Research Associate of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.