Is Africa really in a debt crisis?

In depth
This article is part of the dossier: Africa’s new debt deals

By Gaëlle Arenson
Posted on Wednesday, 8 June 2022 11:40, updated on Tuesday, 14 June 2022 17:41

The number of African countries at risk of debt distress has doubled since Covid-19, but only three of them have opted for debt restructuring. At the same time, the issuance of Eurobonds has continued. Is this a sign of a new maturity?

This is part 2 of a 5-part series

Paris, 22 March. The debate, organised by the Franklin law firm, on the renegotiation of the sovereign debt of low-income countries, particularly those in Africa, is lively. The divergence of views between Michel Sapin and Lionel Zinsou is obvious. The former, an ex-French economy and finance minister, is concerned about the resumption of debt service payments in these countries, which are unable to sustain their liabilities. “We are at a crucial moment; decisions must be made to avoid irreparable damage,” he says.

The latter, Benin’s prime minister from 2015 to 2016 and now managing partner of the investment bank SouthBridge, is less alarmist and keeps repeating that Africans have made progress in managing their public debt based on their past experiences. “There are many more opportunities for resource mobilisation today. They are presented as a worsening of the situation […]. However, the market is doing its job and there is much to be happy about in this new dynamic,” he says.

Concerns have been on the rise since the end of the Debt Service Suspension Initiative (DSSI) in December 2021. This mechanism, set up in May 2020 as an emergency measure to deal with the Covid-19 crisis, was not as successful as expected. It certainly attracted many countries (around 30), but the amounts involved were not up to the anticipated volumes ($5bn for bilateral creditors). The same applies to the ‘Common Framework’ instituted by the G20 in the wake of the DSSI, which aimed to help over-indebted countries restructure their liabilities, but was only requested by three countries (Chad, Zambia and Ethiopia). Is this a sign of African countries’ new maturity in managing their sovereign debts? Is the issue of debt still relevant in Africa?

Increasing importance of private creditors

It is true that the indebtedness of low-income countries has increased considerably over the past 20 years, according to Catherine Bouvier d’Yvoire, managing director for public sector & development organisations at Standard Chartered Bank. A note published last December by the IMF estimates that 60% of these countries are now at high risk of debt distress, if they are not already over-indebted, whereas only 30% of them were in this situation in 2015. Similarly, the nature of the lenders has changed.

“Much more numerous than in 2015, private creditors are now as important as their multilateral and bilateral counterparts; and China, which has become a major creditor to Africa among public lenders, does not have the same transparency practices,” says Sapin, now a senior advisor at Franklin. This implicitly means that the risk of being confronted with hidden debt situations – which was the case in Mozambique – is even higher.

Nevertheless, “remarkable changes have occurred in the debt situation of developing countries”, says Bouvier d’Yvoire. “Over the last ten years,” says the banker, “the nature of the instruments used has changed, the currencies have diversified”. Traditionally, sovereign bond issues in emerging countries were denominated in dollars; today, these same issuers borrow in euros. The terms have also improved for certain sovereign states over the course of their issues, whether for margins (spreads) or maturities. Currency hedging instruments have also developed.

Our continent is no sicker than the OECD countries

There’s also the example of Senegal, which was borrowing at seven years in 2009 and now issues at 30 years; or Burkina Faso, which has continued to issue on the regional market despite the change of administration following the January putsch. At the start of the Ukrainian crisis in the end of February, Nigeria reopened the eurobond market to raise $1.25bn. Angola followed with a $1.75bn eurobond, which was slightly less oversubscribed than its predecessor. As for Côte d’Ivoire, it finally gave up on a new eurobond, preferring to address the regional market, as reported in April by Africa Business+.

Marked increase in GDP for sub-Saharan countries

Another notable development is that countries are borrowing to finance their development needs and to refinance existing debt. This mechanism extends the average maturity of the debt. “If a state can borrow at 30 years on the international capital markets – as some sub-Saharan African countries have done – it then gently re-profiles its debt: it repays a debt issued at 10, 12, 15 years with a debt maturity of 30 years. As a result, we are seeing an improvement in terms for the sovereign issuer,” says Bouvier d’Yvoire. Three categories of countries are emerging on the continent: those in distress, those with access to capital markets, and those that aspire to go there. The panorama is much more nuanced and less risky than it often seems.

The increase in the debt stock is a positive sign, not just a pathology

Moreover, in the 15 years preceding the Covid-19 crisis, the GDP of sub-Saharan African countries grew by an average of 7 to 8%. In some countries, a new calculation of GDP (rebasing) has allowed for spectacular increases, such as in Nigeria (+90% in 2014), Ghana (+60% in 2010), Benin (+36.4% in 2020) and Togo (+37% in 2020). When GDP increases, it is normal that debt follows, explain the experts.

According to Lionel Zinsou, “The increase in the debt stock is also a positive sign, and not just a pathology”. With a turnaround in international financial markets over the past two weeks, marked by rising interest rates that signal the beginning of the end of near-free money, Zinsou says: “In 2021, the abundance of liquidity at the international level has attracted many countries, both in Africa and in the OECD, to the international bond markets. Indeed, if there is a ‘pandemic’ of debt progression, it is not just in sub-Saharan Africa. Our continent is no sicker than the OECD countries.”

“The African Union always calls for debt reduction, but in reality, it happens by itself, it is executed. Sometimes, as crises arise, there is ad hoc treatment, but the truth is that there is continuous debt treatment for the least developed countries. We have to stop making a fuss about African debt,” he says.

Final vestige of a bygone era or an historic advance?

Is the G20’s Common Framework – which is supposed to bring together all creditors to deal with developing countries’ debt –  the final vestige of a bygone era? It’s not so certain. Admittedly, its implementation is proving complex, but for countries in debt distress, it remains the process best suited to relief needs that cannot be met by a single category of creditors. This is the case for Chad, Ethiopia and Zambia – the latter of which was the first country on the continent to default during the Covid-19 pandemic.

The principle of balanced treatment scares private creditors

According to the Paris Club, which was involved in the Chad discussions, the G20’s Common Framework has already produced results: it is the first time that China, India, France, Saudi Arabia and the Paris Club have sat around the same table. The significance of the Common Framework is all the more historic as Beijing, contrary to its usual practice, is on the front lines as co-chair of the committee set up to talks with Chad and Zambia.

In Zambia, where the external debt is estimated at some $17.3bn (more than a third of which is held by China), the authorities hope that the restructuring file will be completed by the end of June. However, two major difficulties remain for the Common Framework. The first is its slowness. Initiated in 2020 in the case of Chad, it has still not been completed almost a year and a half later. In the meantime, the external environment has changed with the rise in oil prices, which has provided the country with a new financial margin. The other main hurdle is the involvement of private creditors in the rescheduling discussions. In Chad, the committee has strongly encouraged private creditors, led by the Swiss trader Glencore, to approach the local authorities, with the aim of achieving a balanced treatment of all lenders on the country’s debt.

Fiscal orthodoxy and the virtuous circle

As Bouvier d’Yvoire says, “the principle of comparability of treatment [balanced treatment] scares private creditors, such as commercial banks, who fear being caught up in debt restructurings with – potentially – a reduction in principal or interest rate. This could cause them to stop lending because their vocation is to lend under conditions of calculated risk”. This is why some countries, such as Kenya, chose not to participate in the DSSI in order to keep their access to this type of financing intact.

Other emerging countries in sub-Saharan Africa that participated in the DSSI, such as Côte d’Ivoire and Senegal, were careful to make it clear to private lenders and rating agencies that the initiative would not be extended to private creditors. “When Moody’s and the other rating agencies realised that these countries only wanted to talk to bilateral creditors, they backed off and removed their ‘surveillance’,” says Bouvier d’Yvoire.

We did an incredible amount of work [in Benin] to create a signature on the international markets

This special treatment of private lenders is not without its critics, as it effectively results in a kind of “subsidy” of their debt by other donors. Perhaps it has also been imposed because the repeated issuance of eurobonds is finally forcing African economies to be more fiscally conformist? In order to maintain their access to international bond markets, the continent’s governments have been encouraged to adopt good management, thus creating a virtuous circle.

As Lionel Zinsou recalls, in June 2015, when he became prime minister of Benin, most of the country’s debt was due within one year. “It was extremely dangerous! And then, in a few years, we went from one year to 30 years. We did an incredible amount of work to create a signature on the international markets,” he says. It must be said that “now, thanks to the quality of their credit and their macroeconomic performance, these countries are arriving on the international capital markets, where the sums offered to them offer them new prospects”, says Bouvier d’Yvoire. “Consequently, there is no longer any question of cutting ourselves off from these markets.”

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