The African Debt Crisis - Sovereign Bonds

Going back to the early 2000's, African countries were too risky to invest in, as they were vulnerable to a variety of problems. African bonds were virtually nowhere to be found, with South Africa the only Sub-Saharan country selling dollar-denominated bonds at the time. Year after year, other Sub-Saharan African Countries have gradually begun issuing sovereign debt.  

However, most experts agree that Africa has become one of the fastest growing regions in the world, if not the fastest. Combine that with a slump in the global economy, an all-time low in interest rates in the U.S., and African countries issuing dollar-denominated bonds, and this cooks the best meal for investors’ appetite in frontier markets worldwide. Though, this fast growing region is suffering from the fastest growing debt. African countries (excluding South Africa) hit a record in 2014, issuing $7 billion of dollar debt and in 2015 they fell just short of that, reaching $6.75 billion. 

This sovereign bond selling spree in recent years has allowed these countries to gradually grow on the cheap. African countries used the debt to invest in a variety of government plans. Ethiopia, Rwanda, Nigeria, Senegal, and Zambia spent the money on infrastructure, such as transport and energy. Others, like Côte d’Ivoire and Zambia, financed development-related expenditures such as health and education. The Ebola virus outbreak illustrates the need to invest in Africa’s poor health systems. For a while, optimism reigned. Bond sales were incredibly over-subscribed. For example, Ghana’s debut dollar bond was four times oversubscribed. Zambia, its ten-year bond, issued in 2012, was 24 times oversubscribed.

On the other hand, several African countries have been through difficult times. Corruption, natural disasters, wars, and spread of disease have made it tough for these countries to spend the debt efficiently and effectively on the economy and to reach their ultimate goals. For those same reasons, African governments are struggling to repay their debts, causing further problems, such as cutting basic services to their people. One African country after the other has sought or is seeking help from the International Money Fund (IMF), World Bank, wealthy countries, and the African Development Bank (ADB). After many years of debt relief, the amount has unbelievably reached $100 billion.

Additionally, countries, whose currencies are depreciating against the dollar, are increasing the cost of servicing the debt of the dollar bonds. Zambia’s currency, the kwacha, lost 42% of its value against the dollar in 2015, almost doubling the cost of servicing its debt. A possible solution to mitigate the increasing debt crisis would be to issue bonds in local currency, thus, eliminating the exchange rates risk. Some countries have issued local-currency bonds. However, unique factors, such as Ghana’s large market size and Kenya’s rapid developing market, are the reasons these countries were able to sell bonds in their local currency.

We always hear that not all debt is bad debt. Countries, just like companies, can reap many benefits from the capital inflow that debt financing provides. Many African countries have taken the risk of issuing debt , and as a result, have been growing in recent years, while simultaneously struggling to repay their debt. Many experts argue for both sides. Certainly, the problems do not apply to all African countries. There will not be a huge debt crisis tomorrow, but African countries need to keep an eye out and plan for both the short term and the long term.