A high level of public indebtedness in Africa has become an impediment to economic growth and many economies require debt restructuring before they can undertake essential structural reforms. By Jason Mitchell.
Sub-Saharan Africa’s public debt has more than tripled since 2010, rising to US$1.14trn at the end of 2022 from US$354bn in 2010, according to the World Bank. It increased faster before the onset of the Covid-19 pandemic – at an average annual growth rate of 12% between 2010 and 2019 compared with 9% during the 2020–22 period. The issue for many African countries is the high level of public debt built up again since they enjoyed US$100bn of debt relief under the Heavily Indebted Poor Countries Initiative and the related Multilateral Debt Relief Initiative some 25 years ago.
Persistent fiscal deficits have been one of the main contributors to the increase, pushing up public debt by almost 20% of GDP since 2015. The average fiscal deficit in the sub-Saharan African region widened to 5.2% in 2022 and the region’s median public debt-to-GDP ratio hit 57% in 2022. The war in Ukraine halted the fiscal consolidation process many countries had embarked upon following the Covid-19 pandemic. The decline in the real exchange rate also contributed to increasing debt by almost 7% of GDP since 2015.
Two decades ago, the official creditors of African countries were primarily the rich Western states, multilateral development banks, such as the World Bank, and the International Monetary Fund. Today, the debt is held by a broad universe of creditors, including insurance companies, pension funds, hedge funds, investment banks and individuals. During the past 10 years, there has also been a big move towards African sovereigns assuming domestic debt. This spread of creditors makes it a lot harder for sovereigns to navigate issues around debt restructuring and makes the whole process extremely slow.
A World Bank survey shows that some 49 African countries owe 39% of their debt to multilateral institutions, 35% to private creditors (excluding Chinese private creditors) and 12% to China and Chinese lenders. In 2021, private lenders charged 5% interest rates, while China and multilateral lenders charged 2.7% and 1.3%, respectively. Domestic debt accounted for almost half of outstanding public debt by the end of 2021.
Four countries in the region – Chad, Ethiopia, Zambia and Ghana – have sought debt restructuring under the Common Framework, launched in November 2020 and coordinated by the G20 grouping of countries. It aims to help countries restructure their debt and deal with insolvency and protracted liquidity problems.
In November 2020, Zambia became the first African country to default on its debts since the pandemic after it missed a repayment of more than US$40m (its total public debt amounted to US$32.8bn at the end of 2022). At the start of 2021, it applied for debt relief under the Common Framework but, by April 2023, it still had not completed the restructuring process. In April this year, Zambia participated in the newly formed Global Sovereign Debt Roundtable as a debtor country. The roundtable also included members of the Paris Club, China and private sector representatives (BlackRock and Standard Chartered). It wants to urgently accelerate the debt restructuring process.
In December 2022, Ghana became the second African sovereign to default, suspending all debt service payments on external government debts, including foreign currency bonds, commercial loans and most of its bilateral debt. In the same month, its government announced an exchange of local currency government bonds with a value of more than US$11bn, which would sharply reduce interest payments to its domestic creditors (mostly local banks, pension funds and insurance companies). Debt service was eating up to 70% of government revenues before the default happened.
Fitch Ratings warned that banks exposed to Ghana’s debt restructuring could “face significant pressure on their capitalisation”. The rating agency believes banks will “suffer large economic losses” when the old debt is exchanged for new debt and quantified the losses at roughly 50%.
Ghana also reached a preliminary agreement on a US$3bn bailout from the IMF, which the fund said would be dependent on receipt of financing assurances from Ghana’s external creditors and on progress on the domestic debt exchange. The IMF board will not approve the programme until it has received those financial assurances.
In November 2022, Chad became the first and only country to reach an agreement in principle with its official and private creditors under the Common Framework. Its external debt amounts to almost US$3bn and its creditors include Glencore, the Switzerland-based commodities trader, and China. It owes one-third of its external debt to commercial creditors and almost all of that to Glencore in oil-for-cash deals dating back to 2013 and 2014.
Ethiopia has also opted to participate in the Common Framework but is still paying its coupon, so is technically current on its debt. The sovereign has a big US$1bn maturity at end of 2024. Malawi is also pursuing a debt restructuring, as a prelude to securing an IMF programme (the fund says it cannot lend into an unsustainable debt position).
Fear of failure
Experts are concerned that there could be a wave of further defaults. A wall of African sovereign Eurobond repayments is looming – around US$10bn in 2024 and a further US$10bn in 2025. The sum is not a great deal in global market terms, but whether it can be refinanced depends on the state of the markets and, most importantly, which countries need to refinance.
“The debt situation in the African region is pretty bad in the sense that more than half of the countries have a debt-to-GDP ratio of over 60%,” said Bartholomew Armah, acting director and chief of development planning, macroeconomics and the governance division at the UN Economic Commission for Africa (Uneca). “The debt is siphoning resources from development spending. Basically, there is a situation where countries are spending most of their resources just to stay afloat in terms of the debt.
“Some element of debt restructuring is needed but, given that the debt landscape has changed and private actors have become a bigger component, they must be at the table as well. The way we have the debt restructuring mechanism through the Paris Club is largely run by creditors that are no longer significant in terms of the debt. You have a changing debt landscape without a changing mechanism in place to address the debt. There is a disconnect between the landscape and the actors that are in charge of the debt restructuring.”
During the past decade, many sub-Saharan African countries have increased their reliance on Eurobonds and Chinese loans. Since 2010, more than 15 countries in the region have issued bonds in international markets, which increased the share of public and publicly guaranteed external debt from 18% in 2010 to 27% in 2021. The share of official bilateral debt, excluding China, declined from 12% to 5% during the same period, while the share of bilateral debt owed to China increased, particularly from 2013 to 2016. At the end of March 2023, there were US$143bn (face value) of African sovereign Eurobonds outstanding, valued at around US$106bn by the market, according to M&G Investments.
As non-concessional debt increased and non-traditional creditors held a larger share of outstanding debt in the region, public debt service increased significantly over the past decade. At the end of 2021, the ratios of total public debt service to exports and revenue reached 28% and 41%, respectively, according to the World Bank. Debt distress risks remain high – the number of countries in the region at high risk of external debt distress or in debt distress stood at 22 in December 2022. No country in the region is at low risk of debt distress.
Chinese question
Furthermore, the G7 grouping of advanced economies is growing increasingly frustrated about what they see as foot-dragging by China in moving forwards on debt treatments for countries seeking help. However, China argues that MDBs should also be required to accept reductions in the debt they are owed.
“The concern is that there is increasing fragmentation not only in the world economy but also in geopolitics, which makes it harder and harder to find a solution to the debt issue,” said Moritz Kraemer, chief economist and head of research at LBBW. “The Common Framework has underwhelmed in terms of outcomes. It was stitched together in a very short time. There was a lot of wishful thinking involved and it was exposed as such. The fault lines are still the same as before and mostly related to China. The debt situation is getting worse and worse. More and more countries are throwing in the towel. As interest rates go up, it’s just going to get worse if we look at credit spreads and interest rate levels.
“In decades past, you didn’t really have much domestic debt because the domestic markets were underdeveloped. In many countries that is still true, but for some countries – including Ghana and Kenya – it no longer is the case. Many domestic creditors are banks and I have some doubt that, if you were to expose them to the same level of haircuts as the international creditors, whether the banking system would remain solvent.”
Sequence dance
Gregory Smith, emerging markets fund manager at M&G Investments and and author of Where Credit Is Due, a book about African debt, said: “My problem with the Common Framework and the current norms for debt restructuring is the sequencing. Official creditors are being restructured first and then private creditors, whereas, if they had got going at the same time, I don’t think the delays would have been as lengthy. We need more concessional financing. Many commentators feel that the IMF and the World Bank could leverage their balance sheets better so that they are able to lend greater sums. For some African countries that have debt pressures, some new net financing that supports investment, that supports growth could help solve the debt problem. Growth is one of the best answers to a debt problem.”
The IMF and World Bank account for a significant proportion of debt servicing for many countries. For example, in the case of Zambia, MDBs make up 23% of external debt. Debt relief from these institutions could be based on the Multilateral Debt Relief Initiative set up by the G8 in 2005 or draw on capital that the MDBs have not yet used (the Capital Adequacy Framework report, published in July 2022, outlines a way to do this).
During the past year, sovereign spreads have increased significantly and narrowed the number of African countries with market access, which raises refinancing risks for countries with large Eurobond redemptions. The average emerging market dollar yield surged to more than 9% last year, rising by more than 400bp during the year. In response, African governments are increasingly resorting to domestic financing. This could put upward pressure on domestic interest rates – which, in turn, will further weigh on investment and output.
Last year, only three African countries – Angola, Nigeria and South Africa – issued Eurobonds in the wake of the Ukraine crisis. In March 2022, Nigeria priced a US$1.25bn seven-year issue at 8.375%; in April, Angola raised US$1.75bn through a 10-year priced to yield 8.75%; and South Africa raised US$3bn (US$1.4bn of 10-year debt at 5.875% and US$1.6bn of 30-year securities at 7.3%), also in April.
By the end of April this year, there had only been two issues out of Africa – from Egypt and Morocco. In February, Egypt repaid a US$1.25bn five-year Eurobond and issued a debut US$1.5bn sukuk three-year offering at 10.875% in tough markets. In March, Morocco issued a US$1.25bn five-year Eurobond at 5.95% and a US$1.5bn 10.5-year at 6.5%.
“African Eurobond issuance was very quiet in 2022 and it has been quiet so far this year,” said Smith. “It has been really tricky and expensive for Africa’s Single B rated sovereigns to come to market. Near-investment-grade credits – for example, Morocco – have done better. There is a divide among African sovereigns in the same way as there is for the wider Eurobond market, whereby if you have an investment-grade rating, you have decent market access, albeit at a little bit more expensive than a few years ago. But if you have a Single B rating, it’s really questionable whether the Eurobond market is open at all, given the huge expense that many Single B issuers have faced this year already. I don’t expect much more issuance out of Africa this year because of the cost of borrowing and the fact that not many African sovereigns will be forced into the market with large maturities this year.
“South Africa has secured its financing for this financial year, but it’s possible but unlikely it will come later in the year. It doesn’t have to come but the market is open to South Africa. Nigeria is tricky because we have just had a change of president there who gets inaugurated on 29 May and will have a cabinet in place by June. If it does do a Eurobond issuance this year, it will be very much at the end of the year and would require a big improvement in market sentiment to get to affordable yields. For Nigeria to come to the market now, it would have to really reduce the maturity down to a three or five-year to get market access and it would have to pay a rate of just under 10%. It’s prohibitively expensive.”
Key concerns
Market analysts are concerned, in particular, about the high level of public indebtedness of two important African sovereigns – Kenya and Egypt. Kenya is faced with large US$2bn Eurobond maturity in June next year. It hopes to find a window of opportunity to tender for some of the 2024 maturity with new financing but concerns that the sovereign is heading towards default are ramping up. At the end of April 2023, the extra yield investors demand to hold the country’s dollar bonds over US Treasuries rose to 1,019bp.
Smith siad that Kenya will need two conditions in place if it wants to come to the market: first, it will have to communicate well with the markets and deliver on its IMF programme and, second, it will need general market sentiment to improve. He thinks the sovereign could come to the market towards the end of this year with a liquidity management deal – a one-for-one, without assuming any new net debt.
Egypt has about US$39bn in outstanding debt in dollars and euros, including US$3.3bn due next year. Its public debt amounts to 88% of GDP (three-quarters is domestic debt). Its interest on its domestic debt costs 10 times the interest on its external debt. The extra yield investors demand to own its sovereign dollar bonds rather than US Treasuries jumped to a record 1,258bp in April 2023.
Interest rates on emerging market sovereign bonds are 2.9% higher than comparable bonds issued by sovereigns with similar credit ratings and economic fundamentals, according to the Journal of African Trade. Experts say that one of the ways to improve the liquidity of financing instruments in Africa, including government bonds, would be a deeper repo market.
“Developed countries have long enjoyed the existence of large repo markets for their government bonds, facilitating the creation of stable and additional funding sources,” said David Escoffier, chief executive officer at the Liquidity and Sustainability Facility, a facility developed by Uneca to support the liquidity of African sovereign Eurobonds and incentivise sustainable development goals-related investments in Africa.
“In the case of Africa, a well-functioning repo market could improve the liquidity of sovereign bonds by providing a mechanism for bondholders to refinance their positions. This reduces the liquidity premia. Repo markets can contribute to reducing interest rates by compressing the liquidity premium, reducing the debt vulnerabilities of African sovereigns and expanding the fiscal space for investments in critical trade enabling infrastructure.”
Economic growth in Sub-Saharan Africa expanded at 3.6% last year compared with 4.1% in 2021 but is only forecast to increase by 3.1% this year, according to the World Bank. Growth is significantly below the sort of level – 6%–7% – that African countries need to reduce poverty on a wide scale. Debt servicing costs are gobbling up a high proportion of government revenues in many African countries. High domestic public indebtedness is also crowding out bank lending to the private sector. Many African countries must bring their public debt levels down so they can focus on investment and economic development.
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