Following 2008, Africa embarked upon a borrowing spree fuelled by cheap and accessible foreign capital. Developed markets that were thought to be risk-free and attractive had the seal of safe investment shredded into pieces as a result of the financial crisis. Policy-makers sought to rectify the damage done to financial systems and economies by enacting a large set of financial reforms, both at the international and domestic level.
The restructuring of the developed economies involved, among other measures, lowering interest rates. This measure, together with an increasing awareness that investment diversification was necessary, made investors with an appetite for higher yields look elsewhere. Africa appeared to be the most promising place. With increasing infrastructure projects and large revenues from the commodities market, the continent enticed many investors looking for the next pot of gold.
The Last Gateway
On the aftermath of the financial crisis, Africa was still a vast market that provided countless investment opportunities. From infrastructure to agriculture, and from fast consumer goods to financial services, the continent offered a variety of business prospects with a potential for high profits. African governments took advantage of the high commodities price at that time and started issuing bonds in foreign currencies at relatively high interest rates.
Eurobonds. That is how they are called. The name is a reference to the location where the first bonds of this type were issued, back in 1963. Now they are simply bonds denominated in a currency other than the home currency of the country or market in which it is issued. These debt investments offer flexibility and liquidity to investors willing to finance ventures in foreign countries.
Just before the global financial crisis in 2008/2009, Sub-Sahara Africa experienced a surge in capital inflows, with many countries venturing for the first time into this mode of borrowing. The Seychelles debut in the Eurobond market happened in September 2006, when the country issued a US$ 200 million Eurobond.
Ghana, right at the brink of the financial crisis, sold a 10-year, US$ 750 million Eurobond, at 8.5% yield, in September 2007. The demand for that Eurobond was much higher than expected: the book size was almost US$3 billion, almost evenly split between U.S. and UK investors. Gabon followed right after, issuing a US$ 1 billion Eurobond in December of the same year. In the first half of 2011, both Nigeria and Senegal issued US$ 500 million, 10-year Eurobonds, yielding 7.0% and 9.1% respectively . Namibia issued its first Eurobond in October 2011 .
The frequency with which African countries started making use of this type of borrowing certainly increased in the aftermath of the crisis. After Ghana’s 2007 debut, the country issued new Eurobonds in 2013, 2014 and 2015. Senegal also tapped into this market in 2011 and 2014, after its first Eurobonds were sold in 2009. Nigeria issued another Eurobond in 2013 and Côte d’Ivoire have issued Eurobonds twice, in 2014 and 2015 . More recently, first-time issuers Ethiopia and Kenya raised US$ 1.5 billion and US$ 2 billion, respectively.
Most African countries that raised money from sovereign bonds have used it to pay for infrastructure investments like transport and energy in Ethiopia, Rwanda, Nigeria, Senegal and Zambia. Others, like Côte d’Ivoire and Zambia, used the money to pay for development-related current expenditures such as health and education. However, some countries used these costly funds to finance budget deficits. The high returns these Eurobonds offer have to be backed by high-profit generating projects, otherwise they will pile up as government debt.
African countries (excluding South Africa) hit a record in 2014, issuing US$ 7 billion of dollar debt and in 2015 they fell just short of that, reaching US$ 6.75 billion .
Exchange Rate Risks and Commodity Dependency
The fact that Eurobonds are pegged to foreign currency leave the issuing countries at the mercy of exchange rate fluctuations. Seychelles rupees are now worth 60% of its value against the dollar from April 2008, while Ghana’s cedi, Nigeria’s naira and Mozambique’s metical are worth between 20% and 40% against US$ exchange rates from early 2008. The West African Franc, official currency of Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo, is now worth 70% of its April 2008 value (Figure 1). The depreciation of local currencies against the dollar has led to significant increases in the present nominal value of the Eurobonds, over and above the value at the time they were issued.
Figure 1 – Currency depreciation in some African countries
The plunge in commodity prices has also drained countries’ international reserves, thus reducing the stock of funds for monthly Eurobond interest payments. Most of Africa’s economies export primary commodities in raw form and the majority rely on one single commodity type as a source of government revenue and foreign exchange earnings. Since commodity prices are a matter of supply and demand balance and depend on the global markets, a fall in prices results in less government revenue and foreign exchange reserves.
Between 2000 and 2011, broad indices of commodity prices tripled, easily outpacing global growth. Since then prices have changed course. Between 2010 and 2013, commodities exports accounted for 34.5% of Nigeria’s GDP, 53.8% of Angola’s GDP and 12.7% of Ghana’s GDP (Figure 2).
Figure 2 – Commodity Dependency, 2010-2013 average, as a % of GDP
Domestic Debt Market
If borrowing in foreign currency brings the risk of unfavourable exchange rates, why not reach out to the domestic market? Although being an appealing alternative to issuing Eurobonds, with the exception of South Africa, domestic markets in Africa are small and lack liquidity. The turnover rates are low as most investors adopt a buy-and-hold strategy.
Capitalisation is usually very low as well. Nigeria, the largest market after South Africa, has roughly US$ 50 billion in domestic bonds outstanding, but this corresponds to only around 10% of GDP. Besides South Africa, only two countries, Mauritius and Ghana, have a domestic bond market capitalisation exceeding 40% of GDP (Figure 3) .
Most of the international investors prefer to stay away from domestic bond markets in such early development stages as those of most of the African countries. Besides the lack of liquidity and the small size, differently from the sovereign issuers, international investors surely prefer a bond pegged to the dollar or euro instead of cedi or naira. In addition to that, domestic bonds are subjected to risks of capital control, which can limit the flow of foreign capital in and out of the country. Hence, Eurobonds are still the best way to attract foreign investment to the continent.
Figure 3 – Outstanding Domestic Bonds, as a % of GDP
Rising Government Debt
Eurobond issuance, the crash in global commodity prices and the strengthening of the U.S. dollar contributed to rising external debt levels in Sub-Saharan Africa. Countries dependent on commodities exports saw their revenue decrease. At the same time, the depreciation of their currency against the dollar increased the relative size of debt payments in foreign currencies.
In most oil-exporting and other resource intensive countries in Africa, the decline in commodity revenue resulted in a particularly large increase of the government debt as a percentage of the GDP. The Republic of Congo saw its debt rise from 22.8% of GDP in 2010 to 51.5% in 2015. Gabon’s sovereign debt grew, in the same period, from 18.5% to 33.7% of GDP, while Angola had its national debt increase from 39.8% to 47.5% of its GDP .
Most of the non-resource intensive countries had a smaller increase in their government debt. Cabo Verde, The Gambia and Mozambique were some of the exceptions. In 2015, their sovereign debt as a percentage of their GDP were, respectively, 121.1%, 100.0% and 61.3%.
Figure 4 shows the gross government debt of the Sub-Saharan African countries, from 2006 to 2015, grouped by oil exporters, metal exporters, oil importers, middle income countries, low income countries and fragile countries. It is observed that the oil exporter countries managed to keep, on average, a national debt below 40% of their GDP. In the other extreme are the fragile countries, categorised as countries that had a presence of a peace-keeping or peace-building mission within the last three years. The average sovereign debt of these nations decreased from more than 120% to just below 50% in the period from 2006 to 2015.
Although all the groups managed to decrease their relative government debt, after 2011 the trend gets back upward. In 2015, the Sub-Saharan countries, on average, had a government debt of 45.4% of their GDP, up from 39.5% in 2012, which was the lowest in the period.
The IMF suggests that above a certain debt level a country may experience debt distress and fiscal sustainability problems. For developed countries this level is 60% of the GDP, while, for developing countries, sovereign debts above 40% of the country’s GDP are already considered risky,.
The trend of debt to GDP ratio is also important. An upward trend may reflect declining GDP growth or increasing borrowings. The current levels of debt in Sub-Saharan Africa are worrisome and the trend shows that, on average, the debt as a percentage of the GDP is steadily growing.
Figure 4 – Government Gross Debt, as a % of GDP 
Furthermore, borrowing costs have generally increased. The cost of external debt has increased sharply since the end of 2014, triggered by the continued decline in commodity prices, oil price volatility, and heightened risk aversion by foreign investors. Yields on Eurobonds are now at or close to double-digit levels in a number of the region’s frontier markets, compared to about a 4.5% to 8.0% range at the end of 2013 .
In broader terms, high levels of fiscal deficit do not necessarily add pressure to a country’s interest rates or inflation. As long as there is spare capacity in the economy or a reasonable level of unemployment, high government debt does not directly reflect into larger current account deficits. This is all true if the interest on the debt is less than the annual increase in nominal GDP. In this case, the debt becomes a shrinking fraction of GDP and the government does not need to take additional measures to raise money such as increasing taxes.
Hence, sustainable high GDP growth is crucial when developing countries are operating at high levels of debt over GDP. Figure 4 shows the GDP growth for groups of Sub-Saharan African countries. After years of strong growth, following 2012 the progress seemed to become somewhat subdued. The evidence of the downward shift in the growth trend became obvious in 2015 when the average GDP growth of the Sub-Saharan African countries dropped to 2.8%, down from a peak at 5.7% in 2012.
The downward effect was more prominent among the commodity exporters and fragile countries. The GDP growth of oil exporters declined from 5.4% in 2012 to a tiny 0.6% in 2015. Metal exporters face an even more drastic change: from 7.5% in 2012 to 1.9% in 2015. However, even oil importers underwent a severe decrease in their growth: from an average GDP growth of 5.6% in 2012 to 2.8% in 2015.
The current high levels of government debt, the fact that most of the countries keep borrowing in the international markets and the sudden loss of steam in the growth of most of Sub-Saharan African economies, sum to a recipe for possible economic crisis not so far ahead. A continuously rising debt ratio is one of the first symptoms of unsustainable developments.
On top of that, countries at high debt levels are more susceptible to suffer in the event of an international economic crisis. Any incident that may cause markets to doubt a country’s ability to service its debt has the potential to push up the risk premiums on that country’s debt.
In 1996, the IMF and the World Bank launched the Heavily Indebted Poor Country (HIPC) Initiative. The programme was designed to ensure that the poorest countries in the world are not overwhelmed by unmanageable or unsustainable debt burdens.
In 2005, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). The MDRI allows for 100% relief on eligible debts by three multilateral institutions: the IMF, the World Bank, and the African Development Fund (AfDF). Creditor participation in the HIPC Initiative has been strong amongst the largest creditors (the World Bank, the African Development Bank, the IMF, the Inter-American Development Bank) and Paris Club creditors. The Paris Club, a group of officials from major creditor countries, have committed to provide debt relief estimated at US$ 21.5 billion .
By 2014, the HIPC and MDRI programs had relieved 36 participating countries of US$ 99 billion in debt. From these countries, 30 are in Africa.
Through the HIPC Initiative, the countries facing high levels of debt are entitled to receive debt relief if they commit to reach certain social-economic goals, which include successful and lasting poverty reduction through policy changes. The criteria more specifically include: improve education and health sectors, reduce infant and child mortality rate, combat HIV and other diseases, improve gender equality and improve water services.
The countries participating in the program commit to preserving peace and stability, and improving governance and the delivery of basic services. Addressing these challenges require continued efforts from these countries to strengthen policies and institutions, and support from the international community.
A Full Cycle
The Sub-Saharan countries should focus on reducing their fiscal deficits and stabilizing their macroeconomic frameworks. One step on this process is the creation of debt management agendas such as the Debt Management Office of Nigeria, formed in 2000 to centrally coordinate the management of the country’s debt and eliminate inefficiencies. The West African Economic and Monetary Union (UEMOA) followed this strategy and in 2013 founded the UMOA-Titres, a regional entity to support public securities issuance and management within the Union.
Improving social-economic indicators and investing in infrastructure have to centre on policies that can avoid the issuance of new external debt. The difficulty of this task only increases in the current low commodities price market. In the absence of alternative revenue sources, commodity exporter countries, such as Nigeria, Angola, Gabon and Zambia, either have to cut fiscal expenditures and imports or increase borrowing.
As governments usually prioritise current spending on wages and salaries, spending cuts would most likely fall predominantly on capital investment. A lasting reduction in capital investment, however, would halt the necessary upgrade of Africa’s weak infrastructure and thus harm growth prospects.
Borrowing from domestic markets at this stage is still very limited. The domestic market for bonds is small and illiquid in most of the countries. South Africa is the only real exception in this case. Hence, if the current strategies are not revised, keep issuing Eurobonds appears to be the only way to cope with lower revenues and to maintain economic growth.
The main longer term risk for Sub-Saharan Eurobond issuers stems from the depreciation of their exchange rates against the USD. As all outstanding sovereign Eurobonds in the region are denominated in dollars, depreciation of the local currency results in more money needed to pay for the debt.
Future indicators do not show any easy path to go. The slowdown of China’s economy, main importer of African commodities; a possible increase in bond yield rates by the U.S., which would make developing markets less attractive; the global oversupply of oil, which prevent its price to rise; and the downgrading of global growth indicators, are all factors that put pressure on countries that have issued sovereign bonds.
Another risk lies in the debt sustainability. For countries to be able to pay back their Eurobonds, they need to use their proceeds in high return investments. Directing these funds to projects that do not generate revenue will only result in additional pressure when repaying the bonds.
The increased economic problems of many Sub-Saharan countries are also evident in recent rating downgrades. In November 2015, 7 out of 23 rated sovereigns in the region have been downgraded.
This is not the first time Africa faces a debt crisis. From 1982 to 1990, African indebtedness rose from US$ 140 billion to over US$ 270 billion. All the causes of that crisis from 30 years ago can find a parallel in current times: poor governance, rapacious and corrupt leaderships, civil wars, no democratic checks and balances on government borrowing and spending, excessive population growth, the stubborn pursuit of economic policies that only contribute to the impoverishment of this rich continent’s population, thoughtless and irresponsible over-lending by private and official creditors and the end of a commodity super cycle.
We are back to similar times. However, with the experience from the past, will Africa manage its finances and avoid a spiralling crisis now?
The author, Otavio Veras, is a Research Associate of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. Otavio can be reached at firstname.lastname@example.org.
 Sudan and South Sudan experienced drastic declines in their GDP in 2011 and 2012 as a consequence of their independence. These abnormally affected the average GDP growth of the “Oil Exporters” group. For this reason, the two countries were excluded from the calculation of the average GDP growth in 2011 and 2012.