When rich countries wrote off billions of dollars of African debt in 2005, they hoped governments would think twice about borrowing again in costly foreign currencies.
Over a decade later, most sub-Saharan African countries still rely on U.S. dollar-denominated debt to finance their economies. Some investors say this is sowing the seeds of future debt crises if local currencies devalue and make dollar debt repayments more expensive.
Aside from South Africa and Nigeria, governments have not yet done enough to develop capital markets that would have allowed them to raise more money in their own currencies, investors say.
United Nations trade body UNCTAD estimates that Africa’s external debt stock rapidly grew to $443 billion by 2013 through bilateral borrowing, syndicated loans and bonds. But since then sharp currency devaluations across the continent have pushed up the cost of servicing this debt pile, which continues to grow.
“We all thought (Africa) was going to be the next emerging market. Governments should have been getting rid of dollar liabilities and moving into local currency liabilities, which is what Brazil did 20 years ago and Mexico 30 years ago,” said Bryan Carter, head of emerging debt at BNP Paribas Investment Partners.
In 2007 Carter was optimistic enough to hold a third of his fund in sub-African local debt. Now he has zero exposure outside of South Africa, he said, adding: “They just fell back into the ‘original sin’ trap of borrowing in dollars.”
After the debt, owed to multilateral organizations such as the International Monetary Fund, was wiped out, investors such as Carter were prepared to accept the risks of buying local currency bonds, in exchange for higher returns.
That would have allowed governments to run their economies, regardless of exchange rate moves between the U.S. dollar and domestic currencies. Currency and interest rates fluctuations have long been a source of emerging market crises.
Stimulating local bond markets, could have helped start a domestic savings and investment industry and also helped to reduce the reliance on commodities exports – a major source of the dollar income needed for debt repayments.
But there’s been little progress on the steps needed to foster local debt markets – pension reform, inflation targeting and making currencies more flexible. Those markets that have emerged are small and with low trading volumes, a similar story to many African equity markets.
Data from Frankfurt-based index provider Concerto Financial Solutions shows 37 sub-Saharan African nations with outstanding local currency debt of just under $260 billion by end-2016.
Of that $146 billion is from Africa’s most developed economy, South Africa, while Nigeria accounted for $40 billion – the only African markets big and liquid enough to qualify for the GBI-EM index, widely used by emerging debt investors
Concerto said stripping out South Africa, 16 African countries have borrowed roughly $30 billion in bonds since 2007. In addition, China has extended tens of billions of dollars in loans and some countries have new debts to multilateral lenders.
“While Africa’s current external debt ratios currently appear manageable, their rapid growth in several countries is a concern and requires action if a recurrence of the African debt crisis of the late 1980s and the 1990s is to be avoided,” UNCTAD warned last year.
Other emerging markets in contrast have shifted almost entirely to borrowing at home. Debt denominated in emerging currencies totals about $15 trillion, or 80 percent of the developing world’s bond stock.
EFFORTS AND ACHIEVEMENTS
Investors do note some positives such as better regulation, growing pension assets and longer 10-20 year bond tenors in many countries. Kenya recently sold the world’s first mobile phone-based bond to ordinary citizens
And Ghana last month auctioned $2.2 billion in cedi debt, the largest ever daily transaction in sub-Saharan Africa. The deal attracted Michael Hasenstab, Franklin Templeton’s high-profile fund manager.
A Ghanaian official said, speaking on condition of anonymity, the government would focus this year on extending the maturity of domestic bonds and would not issue Eurobonds.
Zambian finance minister Felix Mutati too said he wanted domestic borrowing to be the first port of call in future, noting the 2017 budget was being financed largely on domestic markets.
“The domestic market, you cannot just go and dip a bucket into it. It is a delicate operation, the reason being that government borrowing can crowd out the private sector,” Mutati told Reuters, when asked why the government had continued borrowing from overseas.
Some argue external borrowing is key in the early stages of a country’s development.
“The (foreign) borrowing has been invested in infrastructure projects that will drive growth….it is setting the base for future economic performance,” Rwandan central bank governor John Rwangombwa said.
There is no exact data on volumes in local markets. But Kenya, one of the bigger markets with some $12 billion worth of Treasury bonds, trades the equivalent of $16.5 million daily, stock exchange data shows. South African bonds trade $2 billion daily.
“Liquidity is never big enough for offshore investors to really play in and out of the market,” said Delphine Arrighi, a fund manager at Old Mutual Global Investments.
But what is a headache for foreign investors has serious consequences for countries and some are already apparent.
Lack of liquidity, transparency and hedging mechanisms contribute to keeping local borrowing costs high. And external debt ratios have soared as African currencies collapsed against the dollar from 2013. Zambian government debt has doubled since 2012 and three-quarters is in foreign currency, up from 40 percent back then.
Ghana’s debt is over 60 percent of annual economic output, from 50 percent in 2005. Half is in dollars.
Mozambique’s debt default last year may be the first of many, some fear .
“The debt of these countries has just grown exponentially and so now they have no hope of getting there with either a new round of debt relief or default and restructuring,” Carter of BNPIP said. “The priority right now is that they absolutely must stop borrowing in dollars.”