Articles

The Big Squeeze: The state of Africa's Indebtedness

Mozambique's current debt crisis sheds new light on the state of indebtedness across the African continent, writes Diana Nyabongo and Gabrielle Reid
Whilst Africa’s drive for access to funds, requiring, for example, USD 360 billion for infrastructure development by 2040, has seen an eagerness to look beyond the International Monetary Fund (IMF) in favour of more attractive and easily accessible sovereign bond issues, the implications are now proving a concern. During the global commodity boom of 2000 to 2014 several commodity-dependent countries tapped into the international debt markets for the first time. Between 2010 and 2015, more than a dozen sub-Saharan countries, including Côte d’Ivoire, Senegal, Angola, Nigeria, Tanzania, Kenya and Zambia, raised approximately USD 20 billion in commercial debt. These bonds enabled governments to avoid the fiscal measures that accompany concessional loans from international donors such as the IMF. High commodity prices and China’s growing demand for raw materials, coupled with global tailwinds encouraging strong economic growth for emerging economies, offered further attractions for investors keen to ride the Eurobond wave. The bonds could be issued to secure funding for large infrastructure projects, with the bond holders having little input in how the large deposits of money were spent, as well as to restructure debt.  However, it is this flexibility that presents a risk to the issuing country’s ability to meet its debt obligations once the Eurobonds mature. If funds obtained are not used for high rate-of-return projects, governments are forced to fund interest and principal repayments from gross domestic product (GDP). This risk posed to the issuing country is further compounded by foreign exchange risk associated with Eurobonds, all of which are currently denominated in US dollars. With the collapse of the global oil price and the end of the commodity super cycle in 2015, many single-commodity dependent countries, such as Zambia, Ghana and Gabon, saw these risks realised as their exchange rates plummeted and economies deteriorated. As a result, these countries have seen an increase in the real local currency value of their debt obligations, caught in an economic trap where increased borrowing is a necessity so as to reboot and diversify their economies, while repaying old debts. Eurobonds, initially seen as a panacea for economic growth, may no longer be as attractive, and many investors will require higher interest rates before considering investing in the continent. Despite the fiscal tightening associated with concessional loans, their low cost means several African countries may be forced to revisit IMF financing, as its loans are expected to once again become attractive on the continent. 

Ghana

Over 2016-2020, Ghana will require USD 8.5 billion to service its public debt. However, its creditors are expected to be less forgiving than previously, particularly given the increased proportion of private lenders, up to 33 percent of the total by mid-2015. Furthermore, despite a depreciating cedi, Ghana holds the majority of its debt in foreign currencies. Ghana’s 2014 fiscal consolidation program has made some progress in narrowing the fiscal deficit, but in June 2016, in a bold move the government confirmed plans to proceed with a USD 1 billion Eurobond to curb its budget deficit. With little room to manoeuvre in light of the ongoing Extended Credit Facility Arrangement with the IMF, which continues to demand fiscal cuts from the government, it is difficult to see how the Mahama administration can implement the requisite austerity measures during an election year.

Zambia 

In March 2016, the Zambian government announced plans to secure an IMF package to curb the country’s rising budget deficit brought on by low global copper prices, electricity shortages and the economic slow-down of a key partner, China. However, mounting Eurobond interest payments are placing further pressure on the commodity-driven economy. Zambia’s total public debt has increased by 176 percent over the last five years, now standing at USD 9.75 billion, and the country is committed to servicing USD 240million in bond interests annually. Yet an IMF package will only come after Zambia’s August presidential election as IMF conditions are not expected to be electorally popular and the organisation is wary of destabilising political tensions.  

Zimbabwe 

In March 2016, Robert Mugabe’s government announced that Zimbabwe had renewed relations with the IMF, with a loan for an undisclosed sum expected within the third quarter. The financial package will mark the first engagement between the two parties for nearly two decades, after Mugabe shunned the IMF amid his anti-west rhetoric. On the brink of another economic crisis in light of dwindling foreign exchange reserves and a devastating drought impacting crop yields and hydroelectric power capability, Zimbabwe needs to re-engage with the international community. However, serious doubt persists over whether the Treasury has the capacity to repay some USD 1.86 billion of debt to multilateral financial institutions, which would pave the way for fresh loans. Additional loan conditions could include cuts to the public sector payroll, privatisation of state-owned enterprises, and the opening of the agricultural and industry sectors; conditions for which the ruling party has yet to demonstrate any political will to achieve.  

Mozambique

Undisclosed debts amounting to USD 1 billion have likely soured the IMF’s appetite for re-engaging with Africa’s debt market. The Mozambican government had failed to disclose these debts during earlier discussions with the IMF to secure the USD 282.9 million loan granted in December 2015. Triggering the most recent crisis, on 23 May the state firm Mozambique Asset Management failed to make a USD 178 million payment on a USD 535 million loan whilst a sovereign guarantee in support failed to materialise. With the country facing further defaults on repayments owed, in April the IMF suspended funds and placed Mozambique under increased financial scrutiny. Other international donors soon followed suit, amid a plummeting Metical and low global commodity prices. In response, the Mozambique government issued a revised 2016 budget on 10 July, which increased the budget deficit from 10.2 to 11.3 percent. While the IMF, owed approximately USD 247 million, appears willing to work with Mozambique, the outlook is still uncertain in light of the impending USD 727 million Eurobond due to mature in 2023.  

Nigeria

The Federal Government has announced plans to issue a new Eurobond in the third quarter of 2016 in an effort to raise funds to curb poor economic growth, which has been impacted by low global oil prices, a long-overvalued Naira and forex restrictions. This will be the third Eurobond issued by the oil export-dependent country, having secured USD 1 billion in five-to-10 year debt in 2013. Nevertheless, the Federal government will need to do more to improve domestic revenue collection if it is to grapple with growth projections downscaled to 2.3 percent in 2016.  

Gabon 

At 42 percent, Gabon’s debt-to-GDP ratio is below the 50 percent average for an African country. However, in light of the collapse in oil prices, the oil-dependent country has seen depressed growth, resulting in increased national borrowing through the issuance of a Eurobond in 2015, as well as contractionary fiscal measures. In the short-to-medium term, Gabon’s debt-to-GDP ratio is likely to increase, as the country attempts to diversify its economy and stimulate growth through investment in non-oil industries, such as agriculture. Yet with its 2007 Eurobond maturing in 2017, Gabon is hard-pressed for time, and will need to maintain fiscal discipline if these debt obligations are to be met. 

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