Africa Sovereign Debt Spiral Foments Frustration

Published by: INTELLINEWS PRO, January 14, 2023

Africa sovereign debt spiral foments frustration

By Gary Kleiman of Kleiman International Consultants January 14, 2023

This past year, a decade-long Africa commercial borrowing binge with $30bn worth of bonds outstanding came to a screeching halt amid outright or near defaults, with distressed spreads as a measure of risk of over 1,000 basis points to US Treasuries for the sovereign benchmark index cross-section.

Debt topped the agenda at the US-Africa Leaders Summit in Washington, DC in December.

Only three relatively small issues for $5bn from Angola, Nigeria and South Africa reached market, a 5-

year low, as Kenya among other staple participants shelved both bond and syndicated loan plans. Ghana was arguably a poster child for the extreme fortune turnaround as the first to tap private markets nearly 20 years ago, after the official debt relief low-income country HIPC programme of the 1990s. It also self-graduated from International Monetary Fund (IMF) loans after 2019 but found itself as of mid-year in an untenable 100% debt/GDP bind, which has sparked both a domestic and foreign debt revamp and return to the Fund.

The IMF and debt crisis are also intermingled in Egypt and Tunisia, new to the scene the past year, while Zambia has been in default for two years and finalised its own arrangement after business executive President Hichelema won office in late 2021.

The lender, according to its annual report, approved a half-dozen new operations to tackle fiscal and balance of payments woes undermining creditworthiness, including in Cameroon and Gabon. It is a central actor both as creditor and co-ordinator in the so-called Comprehensive Framework, a G20 initiative from the immediate pandemic aftermath designed to allow private and public debt restructuring in a joint process.

Since the programme’s rollout, the soaring dollar, inflation and the Russia-Ukraine war and ensuing food and energy scramble should have multiplied the candidate list, but only Zambia, Chad and Ethiopia remain as the original three.

Ethiopia’s workout was interrupted by civil war, with a tentative truce only recently having been signed, while Chad is the first to complete negotiations after it reached a $1bn rescheduling on an oil loan with commodity trader Glencore, with the net present value of overall debt due unchanged.

Egypt and Zambia in particular underscore the complexity of new official creditor involvement outside the traditional Paris Club, a rich Western country group, with China and Gulf nations Saudi Arabia and the United Arab Emirates as main holders and outcome deciders.

This geopolitical power struggle adds to messy individual cases, where currency and privatisation policies and basic calculations over debt sustainability are in play. At the top of the stakeholder wish list, which ranges from analytical tweaks to a full sovereign bankruptcy court, is an implied orderly process, but the latest episodes are closer to a free-for-all until the new rule set emerges.

Zambia first defaulted on coupons for its $3bn outstanding Eurobonds in late 2020 under then President Lungu, the culmination of years of fiscal and debt mismanagement coinciding with the collapse of copper prices, its main export. At the time, the full extent of borrowing from China’s

Export-Import Bank (Exim), Development Bank and commercial banks was unknown, and the president’s flagrant disregard for economic policy norms was exemplified in his sacking of the nominally independent central bank head for refusing to allow pre-election monetary profligacy. With defeat, investors learned that China had roughly one-third of the total $15bn debt, as his successor embraced the IMF and bondholder engagement to cure non-payment.

In the year since, foreigners poured into the local bond market from zero to take a 15% stake, and the defaulted sovereign bond price reached mid-60s. The kwacha was up 5% against the dollar this past year, and the central bank’s 9% policy rate was a percentage point below inflation. GDP should rise 3%, and the $250mn foreign direct investment (FDI) through the second quarter already matched all of 2021.

In August, the IMF board approved a $1.3bn arrangement focused on food and fuel subsidy rollback, privatisation and debt management strategy. The sustainability analysis that forms the basis of creditor negotiations came out subsequently and sparked a firestorm. It made questionable assumptions about FX reserve growth from the current $3bn and transformation to a primary budget surplus within the next five years, and calculated bottom line debt relief at $8bn, implying a 50% write- off. The bond price plunged to the 50s as a result, and China, which prefers to delay rather than suffer losses, has demanded consultations around the methodology, postponing a possible deal into the first quarter of 2023.

Ghana spiralled out of control early last year after longtime Finance Minister Ofori-Atta, himself an investment bank/securities firm founder, acknowledged the Eurobond market was closed, overturning all budget projections. He stipulated the deficit would be close to 10% and debt/GDP 100% after turning to the IMF for a $3bn, 3-year staff-outlined programme in mid-December, following months of rejecting the prospect. Inflation was 50% in November, almost double the central bank’s 27%

benchmark, on meagre 2% range growth. The cedi has been the world’s laggard against the dollar,

-55% last year, with $6bn in gross FX reserves, an estimated half liquid so that gold companies must sell their stocks to boost the total.

It has been a frequent external borrower since its debut for the sub-Sahara, with 15 outstanding instruments trading on average in the low to mid-30s and a distressed spread of 3,000 basis points over US Treasuries. $500mn in coupons is due in 2023, but no big redemptions kick in until 2024. The 70% unwieldy debt service to budget revenue ratio derives mainly from domestic debt, where long-term yields have spiked to 45% amid foreign fund manager flight, reducing their end-2021 40% portion to less than 10%. For this reason, even before the Fund agreement is finalised, the government has embarked on local restructuring, in contrast with Zambia, where the class was excluded.

It is voluntary in name only and will cap coupons on a progressive scale from zero to 10% out to mid- decade, for an estimated 50% net present value (NPV) hit. Banks and the central bank have one-third of the total, and prudential weightings for the old versus new bonds and the promise of future help from a financial stability fund leave them little choice.

Pension funds with 20% and insurers have resisted initially, as their long-term assets are almost all government securities, and they are still sitting on illiquid paper from a previous banking system rescue. Assuming the transaction goes through, bondholders have started to organise around the same intended 40-50% NPV loss boundary. The Finance Minister has already conjured a 30% principal reduction, roughly translating to current market prices.

Egypt’s foreign slice is less than half its 80% debt/GDP as it again taps the IMF for a relatively small

$3bn, in contrast to the over $20bn that Gulf countries have already committed in deposits and investment to bolster the fiscal and international payments balance.

The tinder for the latest crisis was yet another reversal of non-resident hot money flows into high- yielding local Treasury bills. Foreign investors sold $17bn this year, helping to slash FX reserves 20% to under $35bn. The government has reacted to global market distance by turning to no-interest Islamic-style sukuk and Panda bonds that are China renminbi-denominated. The most visible immediate fallout from its foreign exchange squeeze is a several-month backlog in bank import letter of credit (l/c) issue, and a pound 1-year forward quoted at 30/$ after an initial formal 20% devaluation to the sub-20 range.

Tunisia has botched successive Fund arrangements the past decade since its Arab Spring and is in line for another $2bn, with public payroll cost to national income an emerging market outlier.

Sovereign bonds trade at a 2,000 basis point spread, with debt/GDP at 80% and a record trade deficit cushioned by $2.5bn in remittances and tourism rebound. Two-thirds of public debt is foreign, but only one-quarter is privately held, with investors initially dipping their toes under US and Japan government sovereign bond guarantees.

Its workout is mainly with bilateral creditors as the EU continues aid despite President Saied’s democracy trample, with traditional political parties boycotting last month’s election under a new constitution to restore Parliament. The transfer persists in light of 15,000 Tunisians attempting to cross the Mediterranean by boat in desperation this year, according to migration authorities.