Africa’s Cratered Debt Landscape

The IMF and World Bank issued an inaugural report on African and other low-income economy debt vulnerability after official cancellation and commercial resort the past five years, and found an uneven “landscape” with lower distress risk but deteriorating fiscal and liquidity indicators. They urged “heightened vigilance” at the same time Fund programs have resumed in Ghana and Mozambique, with Zambia likely to be added after upcoming elections. Over 30 countries graduated from the HIPC initiative as of 2013, and since the 2008 crisis debt-GDP ratios have crept up 10 percent for capital and current spending and real interest rates have also increased after being negligible over most of the period. The composition has shifted with reduced exposure to Paris Club and multilateral creditors and more to non-Paris Club members and domestic and foreign bond markets. International investor ownership rose to one-third of local debt in Ghana and Senegal, and to more than 10 percent in Nigeria, Uganda and Zambia. The trend reflects financial deepening but risks crowding out private sector borrowing needs and non-resident participation may be volatile, according to the review. From 2007-14 external sovereign bonds and loans were $40 billion and driven by both global and regional economic and monetary policies. Commercial credit for specific projects with lengthy negotiations has given way to rapid unsecured bond placement with improved African country ratings, and raised fiscal flexibility but also currency risk. For a dozen Eurobond issuers, debt-service will absorb almost double the share of GDP in principal repayment years, highlighting rollover danger. As international capital markets change prudent debt management should diversify the investor base and smooth the maturity profile, and recent operations have spread amortizations rather than follow the “single bullet” last stage. China and other non-Paris Club lenders now account for the bulk of bilateral HIPC lines, which came to 3 percent of GDP in 2014, 40 percent on non-concessional terms with an average 2 percent interest rate, the study data show.

The Fund and Bank loosened commercial debt limits to accommodate both demand and supply but warn that contingent liabilities, such as through public-private infrastructure partnerships, are not reflected in reported figures. In the past five years $75 billion has gone into power and related projects, and underreporting is rampant particularly in the poorest borrowers with limited capacity. The World Bank’s regular institutional assessments have not seen management progress in the majority of countries, and they lack a medium-term strategy associated with normal emerging markets. Since the crisis tax and export revenue performance have helped, but one-quarter including Ghana are in medium-to-high debt stress. It was 80 percent of GDP in the mid-2000s pre-HIPC and has almost returned there according to the latest Fund arrangement calculations. Servicing will take 40 percent of revenue this year, according to Fitch Ratings, and the yield for October’s 15-year global bond was almost 11 percent even with a multilateral guarantee. Interest rates at home are over 25 percent, with GDP growth at 3 percent on slumping commodity exports and the currency off 15 percent against the dollar. The previous Eurobond went largely for civil servant salaries, and investors and the opposition party heading into elections vow that future uses will be productive as they try to resurface the terrain.

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