Indeed, African governments are reaping a plethora of benefits from the inclusion by international financial markets to broaden the scope of their funding sources, swiftly abandoning foreign aid and traditional multilateral institutions.
International financial markets have opened a window thereby providing a suitable platform for African governments to borrow, chiefly for capital spending through Eurobonds issuance. However, this opportunity has been watered down by overexploitation through excessive borrowing. Consequently, debt has been accumulating devoid of a meticulous assessment of risks posed and the consequences thereof, such as exchange rates and the real repayment costs for the piling debt.
The International Monetary Fund (IMF) has pinpointed a total of 17 African countries, with outstanding Eurobonds as near or under debt distress. African governments have been borrowing through issuing Eurobonds which are international bonds supplied by a country in a foreign currency, commonly in US dollars and euros which allows them to borrow in large amounts. Eurobonds borrowing is conducted in commercial terms, whereby the currently prevailing market conditions dictate the interest rate, term of bond and coupon payment. This colossal appetite for African Eurobonds has been galvanizing issuances in the continent, leading to the oversubscription by African states and is driving debt stock to unsustainable levels.
Eurobonds have thrust African governments headlong into a rabbit hole which will cost them dearly and they will have to pay through the nose to settle the debts incurred owing to the high yields demanded by investors, which directly translates to high interest cost for governments. Investors scramble for these African high yield bonds as opposed to Eurobonds issued by other regions, because the latter offer very low interest rates. African Eurobonds are particularly appealing to investors looking for higher yields than those offered by developed countries. Most nations lack the capacity to meet the high yields demanded by investors for purchasing them and as long as the bonds are offered at the interest rates they find profitable, investors will proceed making purchases. On the other hand, Eurobonds appeal to most African governments because contrary to multilateral concessionary loans that come with policy adjustment conditionalities investors buy them without preconditions. Governments are not required to provide detailed information about the specific use of proceeds, nor are there any existing lines of accountability for whether the money was used for the purpose it was intended; there are no checks or balances. This has led to an enormous risk of fiscal indiscipline.
A majority of issued Eurobonds are of short-to medium-term duration; however their proceeds are used to finance long-term projects such as heavy infrastructure projects, or to finance maturing debt obligations and heavy infrastructure projects. Research studies further reveal that some governments opt for irresponsible borrowing to finance unprofitable programmes to further their political ambitions. Often, these funds go unaccounted for or are allocated to loss-making projects.
Due to poor credit ratings and the high-risk perceptions, they are offered at high interest rates have high coupon payments and shorter debt maturities. Consequently, the nation government has a shorter period to use the expensive funds and will additionally pay periodic interest. The stipulated tenure for Africa’s bonds is ten years with an interest rate ranging from 5% to 16%. Africa’s bonds are known to be risky but offer high returns because they are high yields. According to statistics by the IMF and the African Monetary Co-operation Program’s threshold, any debt-to-GDP ratio above 60% in developing countries is considered imprudent. Beyond the threshold a country will be at high risk of debt default.
Africa’s Rush for Eurobonds
Tracing the origins of Eurobonds in the continent, South Africa was the first to issue them in 1995. Eleven years later in 2006, Seychelles became the second Sub-Saharan country to join the Eurobond market. Hitherto, over 21 countries have followed suit, typically listing on London and Irish stock exchanges. In the same breath, heretofore, the 21 countries have sold Eurobonds worth a cumulative total of over US$155 billion on the international bond markets, since the entry by Seychelles.
In 2017, there was an abrupt surge in Eurobonds issuance where $18billion bonds were issued in one year. At the close of 2019, the outstanding Eurobonds on the continent were summing up to $115 billion. By the same token, a total of $19.8 billion bonds has been issued by 10 countries in the past two years. The Covid-19 pandemic slowed down the issuance of bonds with Ghana and Egypt selling a combined $7.1 billion, whereas Morocco issued €2.5 billion in 2020, to boost their fiscal budgets.
In the first half of 2021, Egypt and Ghana made a grand return to the market issuing a total of $7 billion. The debt-to-GDP ratios of the two countries have now increased to 78% in Ghana and 90% in Egypt respectively. Similarly, Kenya joined the two to issue $1billion, catapulting its debt-to-GDP ratio to 66%. Earlier in January, the ratings outlook for Benin shot up after successful Eurobond issuances. Côte d’Ivoire raised $1.03 billion in a Eurobond sale, which was a reopening of a sale issued in November, marking Africa’s first amid the Covid-19 pandemic; that saw investors place orders for triple the amount offered. Over the past three years all the borrowed funds across the continent were spent on non-productive short-term recurring expenditure and repayment of maturing bonds. Gabon, Kenya, Morocco, Egypt, Ghana and Côte d’Ivoire, placed issuances to raise funds to seal the budget deficit and bond refinancing.
Immense fiscal strain has been the outcome of this continued borrowing which has already proved unsustainable for many African countries. Statistics depict that the repayment of interest is the highest and fastest growth expenditure portion in Sub-Saharan Africa’s fiscal budgets. For instance, Ghana, Egypt, Kenya and Angola are paying 37%, 33%, 20% and 25% respectively of their collected tax revenue towards interest repayments. An average of 20% of government revenue is being consumed in debt servicing, leaving very few resources for development purposes.
In February, Ethiopia’s Eurobond plummeted to the detriment of the investors, as the country sought to restructure its external debt, which consequently registered a downgrade in its ratings. Similarly, in late 2020, Zambia defaulted on the repayment of a $42.5 million Eurobond coupon as its frail economy struggled to remain afloat. The Kenyan loss-making Standard Gauge Railway and Ethiopia’s 10 failed mega sugar projects were both funded from Eurobonds.
In most African governments foreign exchange reserves are substantially depleting, while they accumulate debts which need repayment in foreign currency. To meet international finance obligations, governments need sufficient forex reserves. The Covid-19 pandemic’s shocks have caused an economic fallout, which has ultimately called for debt cancellation for highly indebted poverty-stricken countries. The G20 and the Paris Club creditors additionally called for multilateral debt relief to be extended to private creditors.
The feeble fiscal capacity has resulted in the shrinking of tax-revenue in Sub-Saharan Africa through the span of 15 years, in both real and absolute terms. The tax revenue collection in numerous economies is below the minimum desirable threshold of tax-to-GDP ratio of 15%. Such fiscal capacity is too meagre to even finance basic government budget. The continued borrowing only serves to further deepen fiscal vulnerability of African governments. The future generations will bear the brunt of repaying this piling debt, whose signs of unsustainability are but pretty conspicuous, yet met with ignorance. To add fuel to the fire governments continue to flood the market with new bond issues with some being given at higher interest rates than the previous issues.
Potential Feasible Solutions
An imminent debt trap is on the horizon for the continent should the rising debt fail to be mitigated. The borrowing culture in the continent needs to be restructured. Financial discipline needs to be strictly exercised, so that the funds borrowed settle or reduce the accumulated debt and help seal government deficits. However, if the rampant corruption persists then multilateral institutions, despite their shortcomings remains a better devil, in terms of seeking financial aid and affordability to bolster stabilization of economies. Concessionary loans or soft loans with below-market interest rates, coupled with more tenable terms should additionally be considered.
Governments should consider increasing tax revenues or widening the tax base which will assist in paying off budget deficits and public debt in the medium term. Mobilization of greater domestic resources through effective administration is also bound to lower the allure of Eurobonds, therefore greatly aiding in minimizing and the steady eradication thereof, of the unnerving borrowing spree by countries across the board. Fiscal hurdles will be exacerbated and largely magnified, should governments continue issuing Eurobonds without implementing structural reforms. African governments should not ignore the default warnings, but rather discontinue with immediate effect, the excessive Eurobond borrowing. If Eurobond funds were spent accordingly, they are a godsend and hold so much promise for Africa, pertinently in terms of expediting development projects, ultimately trickling down to benefit citizens of respective countries and the continent as a whole.
By June Njoroge