From The Economist World In 2015
AFRICA is the fastest-growing
continental economy on the planet. And the thing that has been growing fastest of all is debt – personal, corporate and government debt. In 2015 Africa and its boosters will start to worry that the debt boom is getting out of hand.
by Richard Walker
Sovereign debt issues from some of the world’s most far-out ‘frontier’ economies, often denominated in African currencies, and snapped up to the very last bill by hungry investors from Zurich to Omaha. This was something unheard of until very recently. Yet the last twelve months have seen countries like Senegal, Ivory Coast (less than five years on from a government debt default) and Zambia issue government bonds for up to $750 million. All the issues were oversubscribed, while Kenya’s recent record-breaking sale of $2 billion in government debt was oversubscribed four times over.
These government borrowings are essentially massive bets on the continuation of the Africa growth story. More betting will follow before the party finally ends – even Ghana, already deep in debt and with Africa’s worst-performing currency, will raise another $1 billion in euro-denominated debt with the backing of the IMF. The African borrowing binge which began in 2007 and which has been driven by investors’ hunger for yield in the post-crisis economy is unlikely to end until interest rates and investment returns in the rest of the world start to normalise.
When that happens, Africa’s lenders will have an opportunity to reflect on how history repeats itself – especially in Africa, with its cyclical resource-dependent economies. Africa has been deep in debt before, and it is already on its way to being deep in debt again. According to the IMF, in 2009 the whole of sub-Saharan Africa raised under $5 billion through bond issues – including both private and sovereign bonds. By 2013 that had risen to over $13 billion, and the 2014 total is likely to come in around $20 billion. Africa’s total government debt-to-GDP ratio which fell to only 30% by 2001 (thanks to debt forgiveness and booming commodity prices) is now heading back up towards its 2001 peak of 70%.
Africa used to borrow from official lenders – governments, the World Bank, the African Development Bank, and the IMF. Today most of Africa’s borrowing is from private sources. Government loans and ‘assistance’ are out of fashion – instead private investors are doing the betting on Africa’s future ability to pay, with bond funds, private equity and individual investors (including African ones) buying government debt. Private debt issued by larger African corporations is adding to the debt pile – in sub Saharan Africa the last couple of years have seen large corporate bond issues from Ethiopia, Mozambique and Nigeria as well as from the traditional issuer South Africa.
Corporate debt is usually dollar-denominated, making it hostage to currency fluctuations, although several governments including Mozambique and Ghana have also recently had to issue bonds denominated in dollars instead of local currencies. But the bigger worry for Africa is over the nature of private lending. If governments get into trouble and need to reschedule their debts or borrow more even while they pay less, official lenders usually oblige. Private lenders are less forgiving.
When developed economy interest rates and long-term bond yields rise – as they inevitably will – private lenders will look on Africa less benignly. Most likely they will demand yields much higher than the seven to nine percent that African government and private bonds are currently paying, if they don’t refuse to buy altogether.
How Would You Like Your Money Sir?
Much will depend on how healthy African government finances are looking. Already, the signs are not good: while sub Saharan Africa actually ran a regional budget surplus during much of the last decade, that surplus has now turned to a regional deficit, as governments have spent big on salaries, subsidies and infrastructure even while commodity prices and tax revenues have fallen. Although the World Bank optimistically forecasts that the regional deficit will soon begin to move down towards 2.5% of GDP, deficits have actually grown fast over the last few years with some countries like Ghana and Tanzania now running deficits of over 10% of GDP.
The world’s debt investors are willing to tolerate those kind of figures so long as investment opportunities elsewhere pay next to nothing. It is quite possible that will not change in 2015. It is also possible that African government spending will suddenly shrink. And maybe the commodity prices Africa depends upon will suddenly boom again. But don’t bank on any of those eventualities.