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Shopping malls, motorways and the new debt treadmill

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Shopping malls, motorways and the new debt treadmill

Between Chinese loans and Eurobonds, Africa has stacked up $110bn in foreign debt over the past decade. This exceeds the amount forgiven to the most indebted countries in the mid-2000s. With several countries running into payments difficulties, is this the new debt crisis? By David Ndii.

During her first independence decade, Zambia was sub-Saharan Africa’s most prosperous nation. By the mid-seventies, Zambia was a solid middle-income country, with $600 income per head in 1975, 30% more than the regional average of $390. Then copper prices tumbled, and continued to decline for the next three decades. Zambia’s fortunes followed suit. By the mid 90s when the economy bottomed out, Zambia’s inflation-adjusted income per capita was just over half of its mid-seventies level.

When copper prices tumbled, Zambia and foreign lenders believed they would rebound quickly. As no country, or individual for that matter, looks forward to adjusting their standard of living downwards, Zambia sought foreign loans to tide herself over a rough patch. Copper prices did not rebound, but Zambia continued to borrow and hope. Over the next decade, her foreign debt grew seven-fold, from $1bn to $7bn.

In a decade, Zambia moved from a solid middleincome country to a poster child of the highlyindebted-poor-countries (HIPC). Copper prices did rebound eventually, but by this time, Zambia had benefited from the HIPC debt relief initiative. Copper prices peaked in 2011 at a whopping $4.60/lb ($10/kg) per tonne, which, adjusted for inflation, is about the same as the 1970s peak price.

In 2012, Zambia debuted in the Eurodollar sovereign bond market with a $750m issue, which was oversubscribed fifteen-fold. Zambia went back to the market with another $1bn issue in 2014 and followed that with another $1.25bn in 2015, for a total of $3bn. In the meantime copper prices tumbled again, and seem to have settled at around $ 2.20/lb.

With copper still accounting for two-thirds of her export earnings, Zambia is only marginally less dependent on copper now than it was in the 1970s. Accordingly, Zambia’s export earnings have taken a beating. The Eurobond issues are equivalent to just under 60% of Zambia’s current annual earnings from copper, $5.2bn last year. The Kwacha went into freefall, prompting the president to call a national day of prayer for the currency late last year.

Is Zambia an outlier? Far from it. Nigeria, Angola, DR Congo and Ghana are all Eurobond issuers who are heavily dependent on primary commodity exports whose prices have also tanked. The case of Angola shows how quickly things can unravel. Two months ago, Angola’s President dos Santos told a party gathering that the country was struggling to service its debts, as a result of the oil price crash. Angola is estimated to have borrowed $21bn from the Chinese, a quarter of China’s lending to Africa.

Immediately after the president’s comments, Angola’s Eurobond bond yields jumped 68 basis points to 10.41%. This is indicative of the rate that Angola would have to pay if it issued new bonds.

The currency has depreciated 40% since the start of 2015 but in the black market it is trading at more than three times the official rate, which signals that further depreciation can be expected.

An IMF bailout was under discussion but the government seems to have gotten cold feet. The IMF had indicated that it could lend Angola up to $4.5bn dollars. It is unclear why the government balked at the offer. The finance minister was shown the door earlier this month. The only option for Angola to avoid default is to turn to China, or go back to the market. Whether the Chinese will throw good money after bad is another matter.

The market is another factor. In November last year, investors snapped up Angola’s $1.5bn 10-year Eurobond, despite Angola being ranked among the worst sovereign default risks in the world. Why? First, Angola paid 9.5% for the money, a handsome return that is hard to come by anywhere else. Second, 10 years is a long time and investors will be counting on oil prices having rebounded by then. Third, the markets may be expecting that, sooner or later, Angola will take that IMF bailout. Whichever way it pans out, the long-suffering Angolan people will have been taken to the cleaners.

In June 2014, Kenya raised $2bn in what remains Africa’s single largest Eurobond issue. So successful was the issue that Kenya was able to quietly tap the market for an additional $800m for a total of $2.8bn.

Kenya is not a resource-rich country, although at the time of tapping the markets, oil prospects were looking very strong, with 600m barrels of recoverable oil confirmed. Kenya’s oil prospects are still thought to be strong, but since the price collapse, prospecting money has also dried up. The find has been subsequently revised upwards to 750m barrels – commercially viable, but nothing to gush about.

Kenya’s Eurobond issue came on the heels of a $3.8bn Chinese loan for a new railway from the port city of Mombasa to Nairobi, due to be inaugurated this month. Prior to the two borrowings, Kenya’s foreign debt stood at $9bn, the bulk of it soft loans from multilateral lenders. The $6.6bn increased the country’s foreign debt by 70%. Unsurprisingly Kenya has begun to struggle with debt service. In October 2015 the government took a $750m commercial bank loan to plug a budget deficit.

Five months later it took another $600m from Chinese lenders, still to plug a budget deficit, making for $1.35bn of unscheduled foreign borrowing in one financial year. Let us put these numbers in perspective. Before these loans, the single largest externally financed project was the AfDB-financed $360m Nairobi-Thika highway upgrade that was the jewel in the crown of the Mwai Kibaki administration. In effect, the Kenya government has borrowed three times the cost of this landmark project to plug a budget deficit in one financial year.

What is it financing? The simple answer is it is borrowing to service debt. Still, suggestions of distress borrowing have been vigorously rebuffed by the government with the support of the IMF, who continue to churn out glowing “Debt Sustainability Analysis” reports, notwithstanding the government’s inability to show a single project financed with the Eurobond proceeds, or to refute claims that a billion dollars of the proceeds did not make it into the budget. What’s more, the IMF’s accounting of the proceeds and that of the government contradict each other, and no explanation is coming from either party as to why. Kenya’s Auditor-General has qualified the government’s accounting of the proceeds.

Africa’s Eurobond issues begin to mature next year, when the bonds must be refinanced or the principal repaid. Repayment is not an option – there is no African country that can afford to pay off a billion dollars in one go.

Zambia issued its first bond at 5.4%, its latest at 9.4%. Ghana is paying 10.5% for its last foray, and that is with a partial World Bank guarantee, and is looking to go back to the market again. Kenya is desperate to go back to the market, but its plans have been somewhat derailed by the cloud hanging over the debut issue. The $750m loan falls due in October 2017 and the $500m Eurobond falls due two years later, with the principal payments on the railway loans somewhere in between.

Between Chinese loans and Eurobonds, Africa has stocked up $110bn in foreign debt, and rising. The borrowings from these new sources now exceed the debt that was forgiven under HIPC ($100bn). The fact that the borrowers are running into payment difficulties, suggests that they have not only squandered the commodity booms, they have squandered the borrowed money as well.

All these countries are now trapped on a treadmill of expensive commercial debt – borrowing from Peter to pay Paul – with little to show but shopping malls and a motorway here and there.

The economic management lesson from Zambia’s earlier debacle, which has been preached to resourcerich countries ad nauseam ever since, is that commodity windfall incomes should be saved, and only income increases that are self-evidently permanent should be consumed. The copper boom and the debts it begot have done little for Zambia’s people. Sixty per cent of them remain in poverty, the highest of any middle income country.

The old swahili adage, asiyefunzwa na mamaye atafunzwa na ulimwengu (one who fails to heed parents will learn from the world), applies. 

  • johnpwfoster

    Really excellent analysis – I look at the debt markets in Africa and the points you bring up David are not properly addressed by lenders or borrowers…no one is saying ‘hold on now – is this deja vu all over again?’ I’m actually really concerned that governments in Africa are walking into a chasm of unsustainable debt that will put all the advances in this so-called “Africa Rising” period backwards. You can see the effect that it’s having with popular protests in Mozambique, Ethiopia (both big borrowers), repression and presidents seeking extensions across the continent, a banking crisis that could reach armageddon proportions in Nigeria (with attendant insurgencies in the north and south of the country) and the financial services sector under a lot of stress in Kenya, which I think will inhibit the economic growth that the country has seen over the last 10 years or so. As you rightly point out, the sovereigns in Africa have not utilised the windfall from the commodity super-cycle (though there is a lot of African government official-owned real estate in prime parts of Paris and London), or the debt that they’ve been able to raise on the back of it to really bring economic change. In the next decade I see a HIPC 2 happening, and the lenders (and their governments) will just capture any future wealth from African nations’ resources as collateral for refinancing.

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