They say that history doesn’t repeat itself, but it often rhymes. Sub-Saharan Africa’s growing debt crisis has different roots to previous crises, but its vicious circle shows a pattern that echoes what’s gone before. Sarah Rundell reports.
It’s difficult to ignore the fact that Sub-Saharan African government debt levels are creeping higher. Zimbabwe, Mozambique and Sudan are struggling the most, but they are far from alone. According to the IMF, debt levels have risen from an average of 29% of GDP in 2011 to 49% in 2018. The World Bank estimates 40% of Sub-Saharan countries are at high risk of debt distress, and the IMF puts 16 countries in its distress, or high-risk, bucket including fast-growing economies like Ghana, Kenya and Nigeria.
Worryingly, economists say it’s not clear if these figures include government parastatal debt. South Africa’s troubled utility Eskom is the infamous example, labouring under a debt burden of around R440bn, 60% of which is government guaranteed, estimates Bloomberg. It’s also unclear if the official data includes all Chinese debt. China lent African countries an estimated US$125bn between 2006 and 2016, according to data from Johns Hopkins University in Washington.
Not only is African debt growing; its structure is different to the past. Two decades ago, most Africa countries borrowed from multilaterals and traditional bilateral lenders based in OECD countries. Today China has become a dominant source of finance, as have the capital markets, with governments building up large exposures to dollar-denominated commercial borrowing. Renaissance Capital puts Africa’s total Eurobond exposure at US$92bn at the beginning of the year, split between 20 countries with 89% of issuance in dollars and typical yields at over 7%. “For some countries, commercial debt is now a large part of their total external debt and that is a worrying trend,” says Afke Zeilstra, senior Africa economist at Atradius Dutch State Business (DSB).
However, despite last year’s record issuance led by Nigeria, South Africa and Egypt (Africa’s three largest economies) experts believe appetite for Euro issuance has cooled. Angola’s scope to issue is limited since it came under an IMF programme, which caps non-concessional borrowing, in 2018. And other economies to come to the market are more one-off issuers than regulars, says David Cowan, Africa economist at Citigroup. “It’s not clear to me how many other countries could or would want to issue. Countries like Benin, Togo, Rwanda and Ethiopia tend to fit into the ‘one issuer’ category.” He is also encouraged that regular issuers like Nigeria and Egypt, with constant and ongoing funding needs, are now able to tap longer maturities to access cheaper funding.
It’s not so much the size of Africa’s debt burden that’s the worry. It’s countries’ ability to service it that lies at the heart of the problem. African economies’ lower tax rate and limited sovereign revenue, combined with fiscal restrictions, make debt servicing an uncomfortable ride for many governments. Countries need to borrow to grow, but there is little sign of any revenue growth to service that debt, and now lower global growth and the China-US trade war are also having an impact. Nigeria is a prime example, with an estimated two thirds of government revenue going on debt servicing, although debt-to-GDP is well under 30%. IMF data shows that Nigeria’s government revenues were equal to just 5.7% of GDP last year.
For Cowan, raising revenue requires a political commitment that governments have so far seemed to lack. “Nigeria could access a whole new stream of revenue if it increased oil production and passed the petroleum bill. Kenya could force Nairobi’s matatu drivers to only accept phone or card payments that would then be taxable,” he says.
The impact of countries’ inability to service debt is starting to ripple out. In a catch-22, elevated sovereign risk means that few large-scale projects get off the ground without government backing. Not only do those government guarantees count towards official debt levels, but government backing of the majority of projects increases demand on the multilaterals, export credit agencies (ECAs) and private insurers who typically partner in government-backed projects.
In the insurance market, this is starting to lead to capacity constraints, flags John Lentaigne, acting CEO of the African Trade Insurance Agency (ATI) “For most major financings outside the bond market, you need insurance to de-risk the transaction and thus allow finance to flow, but insurers’ capacity to take on additional sovereign risk has become constrained in certain markets.” That tightened capacity is starting to show in higher premiums for countries with significant bilateral borrowing like Kenya and Angola, he says. “Often the biggest driver of insurance pricing is capacity, rather than risk.”
In another consequence, the preference for safe sovereign-backed deals also means less money is flowing to the private sector. Governments that borrow heavily tend to crowd out the private sector because insurers and lenders naturally gravitate to easier sovereign deals, says Lentaigne, who articulates the challenges of funding projects that don’t have a sovereign guarantee for the continent’s natural risk taker. “We are very keen to support projects that stand on their own legs, without the need for sovereign guarantees, but it’s not always easy to find these. We look at sponsors’ track records, projected cashflows and whether a project will pay for itself. If it’s too risky, insurers, just like lenders, will require a sovereign guarantee or at the least top-up cash flows that come from the sovereign.”
Dutch ECA Atradius DSB is similarly keen on projects that have sovereign support. “In countries with high levels of sovereign risk we try to steer towards sovereign guarantees from the ministry of finance,” says Marijn Kastelein, export credit specialist in Atradius DSB’s Africa team. “We are much more comfortable having a claim on a ministry of finance or central government than having a claim on a municipality or state-owned entity.” When it provides cover to commercial buyers, the ECA seeks guarantees from a parent company or foreign subsidiary that has access to hard currency to avoid illiquidity risk. The establishment of an overseas debt service reserve accounts also makes it easier to mitigate transfer and conversion risk, he says.
Private sector impact
In another trend, high levels of government issuance is increasingly impacting the private sector by dulling local banks’ risk appetite. The largesse of safe government debt leaves banks under little pressure to lend to local business. Last April, Nigeria raised N100bn (US$326mn) in an auction which included a debut 30-year local currency bond that was four times oversubscribed. In some cases, governments put real pressure on local banks to meet their financing needs, says Robert Besseling, founder and CEO of specialist intelligence company EXX Africa. “The Zambian government actually forces local banks to buy government debt through prescription of assets,” he says. In Kenya, the government caps interest rates at 4% above the central bank benchmark in a bid to cheapen the cost of bank finance for SMEs. But it’s just led local banks to invest even more in better yielding government debt, says Besseling.
Now the impact of a sovereign debt crisis rippling into the local banking sector is on Atradius DSB’s radar. “Banks in Angola and Ghana have large exposures to sovereign risk,” says Zeilstra. Liberalised, robust banking sectors like Kenya are best positioned to weather any shock, says Lentaigne.
Sovereign debt levels are also starting to influence Africa’s relationship with China. It’s visible in both China’s appetite to lend and Africa’s to borrow as a new scrutiny begins to characterise projects. Last June, Kenya cancelled a US$2bn China-backed coal fired power project in Lamu after revisiting the environmental risk of the giant project. Elsewhere, a planned US$10bn port project in Tanzania backed by China has hit an impasse, and in Kenya the Chinese have cooled on the flagship Belt and Road Initiative Standard Gauge Railway, withholding US$4.9bn needed to finish the project. “They’ve got to find the money from somewhere else. China is writing off losses and concerned over the ability of the Kenyan government to service these debts,” says Besseling.
One argument goes that China’s pause – also fuelled by its own economic slowdown – will start to open the door to other sources of finance, giving multilaterals, trade development banks and ECAs a wider window of opportunity. Trade organisations in Japan and India are already jostling for position, says Cowan, who counters that the enduring problem of viable projects hasn’t gone away. “China doing less may open the door to others, but how much is unclear. The Japanese keep reiterating they want to build ‘quality’ infrastructure in a dig at China. Only time will tell how they get in the door.”
Atradius DSB doesn’t link a spike in demand for its cover in Africa to China stepping back. Moreover, it’s a consequence of the Dutch government combining aid and trade via a €125mn Dutch Good Growth Fund (DGGF). “We are seeing demand for ECA cover from new, exotic buyers in Africa like Sudan and Somalia. This isn’t related to China,” says Kastelein. The fund allows slightly higher risk if the transactions have a positive development impact on the buying country, and DGGF transactions must be under €30mn although most are under €5mn. “DGGF also allows us to provide financing – instead of insurance cover only – if commercial banks are not willing to finance a specific deal. For commercial banks, often the biggest challenge inherent in smaller deals for more difficult countries is buyer due diligence,” he says.
Heightened sovereign risk is starting to manifest in important and lasting ways; until governments get better at collecting revenue, debt levels will remain dangerously high. In the meantime, one important first step should include governments improving their disclosure, argues Besseling. Worst offenders include the DRC, Mozambique and Zambia, but the figures don’t add up in other countries either like Tanzania and Rwanda, he says. “A number of African governments are quite clearly manipulating their economic and financial indicators. It poses serious question marks about the viability of projects.”
Elsewhere, the ATI is pushing ahead with an innovative remedy. It is helping some countries reprofile their debt burden by swapping short-term and expensive local currency borrowings to longer-term and more sustainable transactions. “It’s quite complex given the number of counterparties involved,” says Lentaigne. “We are doing it in conjunction with the World Bank in a process that allows countries to both extend and reduce their costs of borrowing.”
Following reprofiling operations in Benin and Côte d’Ivoire, the organisation is looking to help more countries in the region. “We are explaining to governments what we are doing.We’ve got a healthy pipeline.”