- Africa is increasing borrowing on global capital markets.
- Eurobonds are the preferred borrowing option for most African countries.
- The IMF advices setup of a rescue plan for African borrowers, in lure of another global crisis.
Africa capital market access is improving as the world markets start seeing a return to lower interest rates. Between 2007 and 2020, more than 20 African countries tapped into international capital markets to finance their ambitious development plans.
According to the International Monetary Fund (IMF), most of these countries opted for Eurobonds issued by global financial centres.
“Along with this access to the markets came scaled-up lending from bilateral lenders, especially China, and continued access to loans from the multilateral organizations like the IMF and World Bank,” reports Gregory Smith, author of ‘Where Credit is Due: How African Debt Can Be a Benefit, Not A Burden’.
But after a pause by big lenders such as China and a period of high interest rates in the global financial system coupled with Covid-19 pandemic induced economic fallout, African economies are back in the capital markets.
In the past year alone, several African countries including Nigeria, Kenya, Egypt, Ivory Coast as well as South Africa have tapped into the global capital markets, tapping billions to aid in plugging budget holes amid tight debt schedules.
For instance, in March 2023 Nigeria issued a $1.25 billion eurobond noting that the fresh financing will help boost budgetary demands and pay for infrastructure projects. Early this year, Kenya raised $1.5 billion in the global capital markets as part of her strategies to retire the country’s 2014 $2 billion Eurobond debt that was due in June 2024.
In its review of the financial markets, IMF states; “Rather than being viewed as a risk, access to these markets should also be seen as an opportunity to boost the region’s growth and development.”
The IMF warns that the Sustainable Development Goals (SDGs) will fail if governments cannot access sufficient private capital. According to the IMF, investors are attracted by Africa’s expanding economies, improved macroeconomic policies, and the low debt levels thanks to the debt relief that many African countries enjoy.
Also read: China’s $4.6Bn loans to Africa signal strategic shift ahead of key forum
Is Africa’s capital market simply growing debt or a sound investment?
The IMF reports that African eurobonds reached $140 billion in 2021, of these, most are long dated bonds of 30 years or more. “The increased bonds have meant African countries have increased their weight in the main emerging market bond indices,” Smith writes.
“The good news is most market accessing African countries have been building repayment track-records. Many bonds have been repaid in full at maturity, while others have been bought back ahead of time,” the author reports.
The IMF backs this move saying, “The shift to more active debt management is a good sign as countries are either taking advantage of lower borrowing costs or dealing with any spikes in their repayment schedules.”
IMF further explains this growing interest for eurobonds as a means of quickly raising financing that African governments are free to invest as they see fit. “In addition, the borrowing does not have the policy conditions that official lenders often attach to their financing,” reads the report.
It further explains that the Eurobonds offer choices on the terms of lending that empower debt management offices in a way that concessional lending does not.
Good media reports have also played a part, according to the IMF, which says eurobond issuance has coincided with much better coverage of African economies in global financial media.
Further still, Africa is choosing eurobonds because they are transparent, that is, all the terms and conditions of the loans are published by the exchanges the bonds are listed on.
On the down side of things “…eurobonds and other forms of market borrowing does not come cheap,” warns the IMF.
However, the cost of the Eurobonds depends on the status of the borrowing country; “the cost of borrowing reflects judgment on the quality of the bonds being issued and this largely depends on how investors assess the issuing sovereign’s economic, political, social, and climate risks.”
That been said, the IMF still warns that; “While capital markets can be a useful source of financing, their loyalty is not guaranteed. Sentiment can shift quickly if a country’s policies change, its economic outlook deteriorates, or even if something goes wrong in another part of the globe. African countries can also find themselves shut out of the markets during a bout of global risk aversion, as was the case in early 2020 when the pandemic tipped the global economy into recession.”
As such, African borrowers are cautioned that because of this volatility, combined with the foreign currency risk and high cost of borrowing, can make eurobond borrowing hazardous.
So, all factors considered, the IMF is of the view that capital market access does not currently make sense for all African countries.
“Many economies remain too small for the minimum scale of lending the markets require or lack the foreign exchange earnings to service borrowing beyond their access to concessional loans,” explains the IMF.
Still, when compared with other parts of the world, African countries’ debt levels in US dollar terms are small, Smith writes in his ‘Where Credit is Due: How African Debt Can Be a Benefit, Not A Burden’ publication.
“Advanced economies have borrowed vast amounts more. Even when debt levels are compared relative to the size of economies, only a few African countries stand out as having particularly high levels of debt,” he notes.
The author also explains that while large, advanced economies like the United States or Japan borrow in their own currency, most African countries have a greater dependency on borrowing in foreign currency making them dependent on performance of and access to that currency.
Even though, so far, African countries have been able to clear their debts in a timely manner, the IMF backed author says there are general concerns about rising debt levels.
“There is uncertainty about how much medium-term debt sustainability has been eroded. Is it just a matter of time before many African countries default? Is a systemic debt crisis now unavoidable?” he queries.
“What is clear, however, is that another crisis would be much harder to fight unless there are efforts to reduce debt risk and shift to better ways of borrowing,” he advices.
Sustainable Development Goals
Also; “Eurobonds and market access should remain part of most African countries’ financing mix, so that they can ensure the Sustainable Development Goals get the required financing. However, efforts can be made to safeguard market access.”
The IMF suggests some precautionary measures to safe guard Africa’s capital market borrowing including tighter use of proceeds.
“If the money raised from bonds and loans were put to better use, then borrowing would be much less risky,” it advices.
Africa is advised to building stronger systems for managing public investment. In particular, African borrowers are urged to prioritize their list of projects, tools for better project design, and improved procurement.
The IMF also advices the set up of rescue plans, that is, a new scheme needs to be prepared and ready in the event of a shock that initiates a systemic debt crisis.
“There should be a menu of options that would allow countries in distress to select those best suited to their problems,” the IMF suggests.
