Carsten ten Brink

The recent Fed rate hike and the expectation of further hikes and commencement of balance sheet unwinding has refocused African economic and financial minds on sovereign debt. Though, the consensus view suggests a debt crisis sequel is probably unlikely, a significant number of observers believes the path of sovereign debt on the continent is somewhat worrying. Debt to GDP ratios in most countries that saw debts written off as part of the Multilateral Debt Relief Initiative (MDRI), approved in 2005, are still lower than during the debt buildup which begun in the 1970s and nearly all these economies are now structurally stronger. It is widely accepted that with current external debt mainly privately held, if conditions deteriorate, the sequel is unlikely to see as much forgiveness and understanding as the original.

With more countries issuing Eurobonds (foreign currency, usually dollar, denominated debt) of increasing value, (2017 already holds the record for African Eurobond issuances) the cases of Ghana and Mozambique are offered as cautionary tales by those who believe that the continent could drift into a debt crisis iceberg.

In 2007, Ghana became the first African MDRI recipient to access international capital markets for a bond issue. It was heralded on the continent as a sign of necessary progress. This week the IMF stated that, “Ghana remains at a high risk of debt distress”. The country’s 2014 $1 billion IMF Extended Credit Facility (ECF) arrangement to help restore “debt sustainability and macroeconomic stability” is scheduled to end in April 2018 and is likely, according to various sources, to be extended until at least December 2018. At the end of 2016, debt to GDP was estimated to be more than 70% whilst the public wage bill accounted for more than 50% of the government budget. How did it come to this for West Africa’s second biggest economy and still one of the most developed countries on the continent? A wage bill that reached nearly 70% of the budget in 2012 and a currency that depreciated dramatically making it Africa’s worst performing currency in 2014 partly due to reduced revenues from cocoa, gold and oil exports. A power crisis also contributed to lower economic growth in 2014 and 2015, a story replicated across the continent; 2016 the lowest growth year in the last two decades. Since 2007, the country has issued multiple financing and refinancing Eurobonds. Though slowly recovering, the outlook is not as rosy as it once was and though debt is by no means the sole cause of subsequent economic problems, it shows how misplaced debt financed spending and uncontrollable global factors can lead to a cycle where more and more debt is needed.

The case of Mozambique is somewhat starker. Somewhat paradoxically, the country’s currency, the metical, is the world’s ‘best’ this year, despite the fact that Mozambique is technically in default after missing multiple scheduled debt repayments. Africa’s first Eurobond default since Ivory Coast in 2011 has been caused by the government’s stated inability to make repayments on secret loans worth more than $1 billion and an $850 million ‘tuna bond’, arranged in 2013. The 2016 revelation of this previously undisclosed debt saw the IMF and other donors subsequently suspend aid, significantly detrimental to a recipient of IMF credit and a country where donors fund at least 25% of the state budget. Liquidity problems and inflation were unsurprisingly exacerbated by the funding withdrawal of funding. The story of the ‘tuna bond’ is particularly notable. Ematum, the state owned fishing company, borrowed money from Credit Suisse and VTB, a Russian bank, ostensibly to ‘fishing infrastructure’ for a new tuna fishing fleet. The two banks along with France’s BNP Paribas securitized the loan which crucially was backed by the government. A Reuters reports cites Ematum records showing that in 2015 there was a more than $17 million gap between the value of projected and actual tuna catch. The project income needed to service the debt was thus nowhere to be found. Worse still, it came to light that a significant amount of the borrowed money was used on naval hardware.

A debt to GDP ratio that has ballooned from around 40% in 2013 to 120% now, a fact described as frightening by the central bank governor, and the delay of talks on a much needed IMF program are casting a cloud over what was one of Africa’s fastest growing economies. However, as the currency situation hints at, there is a silver lining that both officials and investors believe can revive the economy. An $8 billion deal to develop the Coral South gas field off the Mozambican coast signed on June 1st and led by Italian energy company Eni can “bring the economy back to the performance of the last decade” according to Mozambican president Filipe Nyusi.  Production is expected to start in 2022 and the project, described as the world’s first ultra-deep-water floating LNG project, is expected to generate more than $1 billion per year over 25 years.

With an independent forensic audit into the debt by Kroll Associates completed and received by the Attorney-General but yet to be made public and the internal and external political dimensions surrounding ramifications of any findings, the country’s short term economic future is far from certain.

Some fear that these two case studies may be replicated in differing orders of magnitude and form across the continent. Currency depreciation causing inflation, questionable public expenditure and increasing external debt stocks are the templates on which future crises may be laid.

Optimists however point to the fact that local debt stock still far outstrips external debt stock while only 10 of 39 African countries in the IMF’s latest Debt Sustainability Analysis are described as in debt distress or at high risk of debt distress, little change from the nine countries in the November 2015 figure.

With 2017 already a record year for the value of African Eurobond issuances, partially due to African bond yields still on average 1% greater than the emerging market average, both parties agree on the importance of finding ways of mitigating potential external debt problems. Particularly as most solutions may lead to continental economic development independent of the probability of future debt problems.  Below is a brief summary of some the potential solutions.

  • Improved tax administration (nationally and internationally)

Tax revenues in many African countries are at about a fifth of GDP, significantly below the OECD average of a third of GDP. Increased tax revenues will allow governments to diversify their revenue sources, reduce dependency on export revenues and increase the funding pool for public services. Tax arrangements by foreign based companies, particularly resource extractive companies, see millions of dollars to flow out of Africa countries either untaxed or minimally taxed. That this happens from Addis Ababa to Auckland illustrate the importance of a global solution to tax avoidance.

  • Strengthening debt legal frameworks (internationally and nationally)

The failed establishment of an IMF led Sovereign Debt Restructuring Mechanism in the wake of Argentina’s 2002 debt crisis was an aborted attempt to bring sovereign debt resolution into an organized internationally administrated framework. Revisiting this proposal, by tackling its strengths and weaknesses, may be useful especially in an era where most emerging market debt is now privately held.

On a national level, national debt management on the continent needs to be significantly improved according to most experts, especially with more African countries issuing more debt. Debt management offices (DMOs) or their equivalents are needed to ensure adequate attention is given to debt funded project bankability and mutli-situational debt repayment plans. The example of Nigeria’s DMO which has contributed to a relatively healthy domestic debt market, through increasing market efficiency, access and size and international recognition of its local bonds in the JP Morgan and Barclays emerging market indices are an example that most countries can learn from. Enshrining debt issuances in law may also help to minimize odious debt situations.

  • Technology utilization

The example of Kenya’s world first mobile phone government bonds is an example of how technology can be used to fund government expenditures. The bond, which can be bought without a bank account and offers a 10% interest rate, allows small investors to participate in helping fund the country’s economic development as its minimum investment amount of about $30 compared to the near $500 minimum for conventional government bonds which have a commercial bank account prerequisite. Tradable on the secondary market, it may improve liquidity in Kenya’s financial market whilst boosting the country’s domestic savings rate which is relatively low by regional standards.

  • Taking advantage of diaspora wealth

The wealth and income of Africa’s vast diaspora population must be utilized to support economic development on the continent. Diaspora bonds and remittance backed loans, if organized and promoted effectively, as done in India, Israel and Guatemala could see foreign exchange receipts and an investment boost that helps revenue diversification for the government while providing businesses and individuals with an alternative source of funds.

All in all, it must be accepted that international debt will continue to be taken on. The continent’s massive infrastructure deficit alone is unlikely to be plugged without taking on more external debt. Indeed, as some point out, overextended domestic activity by the government could have a crowding out effect on the private sector. However, it is key that the cited methods in conjunction with stronger institutional capacity and transparency ensure that debt taken on is used wisely and efficiently for the benefit of both current and future Africans.