Foreign Creditors Invest $140bn in African Debts –Report
Foreign creditors invested an estimated sum of $140 billion in Africa’s sovereign international and domestic debts between 2015 and 2021, S&P Global Ratings said in a report citing data from the International Monetary Fund (IMF).
According to the report, foreign investors were attracted by Africa’s enormous economic potential, vibrant demographics, and rich financial returns. They pumped money into local and international debts.
This increased African general government debt to gross domestic product (GDP) levels by an average of 20 percentage points of GDP during the five years before the 2020 global pandemic, leading to a series of African sovereign downgrades.
But times have changed for sovereign financing in Africa, S&P Global Rating said, noting that since 2022, a series of global markets shocks has effectively closed commercial Eurobond markets for lower-rated borrowers.
This has forced the majority of African sovereign issuers to shift away from external financing and pursue domestic borrowing instead, with varying degrees of success, according to the report.
Domestic markets have been mixed as have banks’ ability to meet high funding demands.
“Africa is far from homogenous in terms of local capital markets development, savings rates, and financial inclusion.
“Financial systems vary in size from more than 100% of GDP in middle-income economies such as Egypt, Morocco, Mauritius, and South Africa, to below 40% in heavily-indebted poor countries such as Cameroon, Congo-Brazzaville, DRC, Ethiopia, Madagascar, and Uganda”.
At the lower end of this range, S&P said frontier governments that found themselves locked out of foreign markets by early 2022 quite quickly started to come up against hard domestic funding constraints.
In Ethiopia, Ghana, and Nigeria, low domestic savings saw governments reverting to central bank deficit financing. This development accelerated monetary growth, exacerbated inflation, and propelled retail demand for U.S. dollars and/or imports, S&P said.
The report reads that what started as a fiscal shock quickly developed into a balance-of-payments shock. Foreign exchange (FX) reserves are now frequently being drawn down as central banks endeavour to fight currency depreciation.
One policy response has been governments deciding to negotiate IMF lending arrangements despite the high domestic political cost of doing so. S&P Global Ratings is of the view that African domestic debt markets are generally shallow, with some exceptions.
It noted that others are effectively repressed by governments focused on refinancing debt at interest rates below inflation. In several of these jurisdictions (Egypt, Ethiopia, and Nigeria) the financial sector is at least partly publicly owned.
As a refinancing strategy, the report said financial repression can “work” by keeping the cost of debt manageable. However, the side effects can include crowding out lending to the private sector with long-term detrimental effects on productivity, competitiveness, and wealth.
“Banking systems may prefer financing large top-down public infrastructure projects with unproven returns, rather than small and midsize enterprises, to the detriment of long-term development.
“Where African sovereigns have boosted the size of domestic pension savings, and the non-bank financial sector more generally, these financing sources can provide important buffers against non-resident outflows in the face of G7 monetary tightening.
Botswana, Mauritius, Morocco, and South Africa have larger pension and other non-bank financial institutions, which typically accept lower returns than those sought by foreign investors and commercial banks.
Kenya and Zambia have also made progress in growing their non-bank financial sectors. Nonresident participation in local currency capital markets is a mixed blessing.
It can increase the supply of domestic lending, but in less developed markets it can also create currency, interest rate, and balance-of-payments volatility during global market shifts–as Egypt has recently experienced.
Notable fluctuations in exchange rate and inflation dynamics have led average debt maturities to shorten in Egypt, Ghana, Kenya, and Uganda. In these countries, bondholders have abstained from investing in longer-term bonds in anticipation of future rate hikes and currency volatility, S&P Ratings said.
This increases annual gross borrowing requirements and the speed of the pass-through of higher market rates into the budget. Sovereigns have defaulted on local currency debt only half as often as they have on foreign currency obligations.
Cameroon and Zambia, for example, missed payments on external obligations in 2022 and 2020, respectively, according to the report.
However, it was noted that the relative unsustainability of local borrowing costs has raised the incidence of domestic debt restructurings across the continent.
Since 2020, two African sovereigns (Ghana and Mozambique) have defaulted on domestic obligations, while five (Angola, Ethiopia, Kenya, Uganda, and Nigeria) have engaged in non-commercial debt exchanges.
S&P Global said while the latter exchanges did not constitute defaults, they indicate growing domestic fiscal pressures across the continent.
It added that over time, limited pools of domestic savings in most African economies–which ultimately reflect lower levels of development–will continue to cause difficulties in a world where the return on risk-free assets is quickly increasing via quantitative tightening in advanced economies.
With central banks unlikely to cut rates in the foreseeable future–locking lower-rated sovereigns out of global capital markets and keeping domestic borrowing costs elevated–the way forward will likely entail riskier quasi-fiscal activity or restructurings of local currency debt.
This will have broader implications for medium-term social stability, economic growth, and development, already hard-hit by multiple recent exogenous shocks, according to S&P Global. Gold Hits $2,008 as US Dollar Weakens
