Many African economies are suffering from a severe funding crisis – with international financial markets shut off and donor aid drying up – putting a halt to social and economic development. By Jason Mitchell.
Economic growth in sub-Saharan Africa is expected to decline to 3.6% this year from 3.9% in 2022, as a big funding squeeze has taken a grip on the region, according to the International Monetary Fund. The cost of international borrowing is prohibitively high for most countries in the region. All sub-Saharan African frontier markets have been cut off from market access since spring 2022, with no Eurobond issuance. Most countries have been able to borrow in local capital markets but at a higher cost.
The US dollar effective exchange rate reached a 20-year high last year, increasing the burden of dollar-denominated debt service payments. Interest payments as a share of revenue have doubled for the average sub-Saharan economy over the past decade. African countries have tried to fill the gap left by declining foreign aid by assuming more expensive commercial debt in domestic and international capital markets. This has triggered a rising interest burden on public debt and led to debt ratios not seen in decades. More than half of the low-income countries in the region are either at a high risk of debt distress or in debt distress, according to the IMF.
The average debt of the region’s five biggest economies stood at 58% of GDP in 2022. South Africa is expected to remain the most indebted among these major economies, with its debt surpassing 70%. Meanwhile, Nigeria’s public debt hovers at around 40%. Furthermore, at the end of 2022, 10 countries within sub-Saharan Africa – including Sao Tome and Principe, Somalia and Equatorial Guinea – experienced relatively low international reserves, failing to meet the threshold of providing import coverage of a period of three months.
The severe funding squeeze is forcing countries to reduce the fiscal resources available for essential development work, including health, education and infrastructure.
“The sub-Saharan Africa region has been hit hard by the funding squeeze,” said Andrew John Tiffin, deputy division chief of the IMF’s African Department. “The global monetary policy tightening cycle and rise in risk aversion in global markets caused spreads of sub-Saharan African sovereign bonds to widen significantly over the emerging market average in 2022. Moreover, high borrowing costs come at a time when other sources of external financing such as official development assistance and loans from China are on a declining trend.
“Overlapping crises, decelerated growth and exchange rate deprecations have led to ballooning fiscal deficits, pushing public debt to heights unseen in decades. There has also been a notable shift in debt composition towards more expensive private sources, further elevating debt service costs and the associated rollover risks.”
However, sovereign spreads on Eurobonds have eased since March this year. The average spread for sub-Saharan African frontier markets (excluding Ethiopia and Zambia), declined from about 1,035bp at its March 2023 peak to 761bp on 24 August 2023. Nonetheless, the IMF says that borrowing rates remain uncomfortably high compared to pre-Covid levels. Weak economies where sovereign bond yields are very high include Zambia, Ethiopia, Ghana and Mozambique.
The average yield on outstanding Eurobonds for sub-Saharan Africa (less Zambia and Ethiopia) has declined from almost 14% in March 2023 to 12% in August 2023. However, it is significantly higher than the pre-Covid yield of 7% witnessed between January 2019 and January 2020.
“Financial conditions in international markets have been easing since March this year, helping to reduce the sovereign spread,” said Tiffin.
“This is driven in part by inflation coming down and recession risk subsiding in advanced economies. If financial markets continue on this trend, it will be easier for sovereigns to tap the international debt capital market in the near to medium term. Who will have access at a decent borrowing rate will depend crucially on their macroeconomic fundamentals, as well as on possible shifts in international investor risk appetite. Countries with better economic fundamentals will have lower borrowing costs and will have access to DCM earlier than countries with weaker fundamentals.”
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. 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.
Changing creditors
Two decades ago, the official creditors of African countries were primarily the rich Western states and multilateral development banks such as the World Bank and the IMF. Today, the debt is held by a broad universe of creditors, including insurance companies, pension funds, hedge funds, investment banks and family offices. During the past 10 years, there has also been a big move towards African sovereigns assuming domestic debt.
In December 2022, Ghana became the second African sovereign – after Zambia – 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. Debt service was eating up to 70% of government revenues before the default happened.
In July 2023, the government invited domestic pension funds to exchange about C31bn (US$2.7bn) of investments that carried an average coupon of 18.5% for two new bonds, maturing in 2027 and 2028, with an average interest rate of 8.4%.
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 May, the IMF approved a US$3bn loan to Ghana after the West African country’s creditors, including China, agreed to a debt restructuring deal. Zambia also secured an IMF bailout last year following assurances from official creditors, led by China, that they would provide relief on their loans to the Southern African economy, after it defaulted in 2020. However, China has since failed to agree on specific restructuring terms with other creditors, leaving Zambia’s finances in limbo and holding up a second IMF payment.
“The macroeconomic outlook of African countries remains challenging,” said Andrew Dabalen, the World Bank's Africa region chief economist. “We’ve had Covid; we’ve had shocks of all kinds, including war, natural disasters, internal conflicts; we have had inflation; we have had a number of shocks and events that have really led to low growth, loss of food security and a real pause to poverty reduction. Some of those events are now beginning to manifest themselves in terms of social instability. The region is suffering a confluence of so many challenging situations that we think, potentially, it could lose almost a decade of growth.
“We see instability in two ways. We see it at the macro level, but that feeds into political instability as well. We have had [coups d’etat] in almost an entire belt stretching from the Atlantic to the Red Sea. We also see low-level instability. There have been a lot of contestations about elections, about the way in which countries are governed. A lot of it has at its root macroeconomic instabilities. High levels of inflation, lots of fiscal challenges, high levels of debt are making it difficult for these countries to do core development work, to deliver services and to invest in infrastructure.”
Experts say that a decline in foreign aid is making it harder for sub-Saharan African countries to finance their economic development. According to data from the Development Assistance Committee of the Organisation for Economic Co-operation and Development, aid to sub-Saharan Africa – expressed as a percentage of recipient countries’ GDP – halved over the past 30 years. Using a three-year moving average, it dropped from 5.7% of GDP in 1992 to 2.4% in 2019.
Budget support to sub-Saharan Africa – as a percentage of recipient countries’ GDP – has also halved over the past 20 years. Aid increased in 2020, when financing from international financial institutions improved by one-quarter in response to the impact of the Covid-19 pandemic. However, the decline resumed in 2021 – preliminary data indicate that aid to the region decreased by almost 8% in real terms during 2022.
A number of factors are behind the decline in foreign aid. First, the size of sub-Saharan Africa’s economy more than tripled in real terms between 1992 and 2022 and living standards have improved (GDP per capita increased 40% over the same period), so constant aid flows in real terms have dropped when expressed as a percentage of GDP.
However, this trend is also explained by a lower commitment from some DAC donors. Aid to sub-Saharan Africa expressed as a percentage of DAC members’ GDP has reduced by 20% over the past 30 years. Since the onset of Russia’s war in Ukraine, DAC members have instead significantly increased their spending for refugees at home (in-donor refugee spending multiplied by 2.3 times in real terms in 2022).
While many African countries will see a modest increase in growth this year – notably non-resource-intensive economies like Kenya – the overall regional average will be dampened by stagnant growth in pivotal economies. For instance, South Africa is expected to grow by only 0.3% in 2023, a a sharp drop from 1.9% in 2022, weighed down by an intensification of power outages.
Furthermore, many African economies confront enormous challenges in funding their imports, particularly those with less diversified economic structures. Oil prices increased last year but have recently been on a downward path, driven by weakening demand from China. As a result, large oil producers – including Nigeria and Angola – are grappling with worsening trade conditions.
One thing after another
“We had a really bad crisis through Covid in which debt levels jumped in a number of African countries,” said Gregory Smith, an emerging markets fund manager at M&G Investments and author of Where Credit Is Due, a book about African debt.
“We returned to growth afterwards but then went straight into another crisis, which was prompted by Russia’s invasion of Ukraine. It pushed up global food prices and energy prices and made it difficult for a lot of African countries to meet their external financing needs, combined with the rate hiking cycle that the US Federal Reserve undertook.
“Although markets are suggesting we are very close to the peak in US rates, borrowing costs remain very high, particularly for countries without an investment-grade credit rating (all but about two African countries).
"The way I think about Africa is that it has three buckets of countries. First, there are poorer countries, which are outside the markets and rely on overseas development assistance or foreign aid. Aid at the moment is insufficient to meet their financing needs and their debt levels are elevated, so interest costs are taking money away from the delivery of important public services. There is a real problem for these countries but it is not a markets problem, as most of them have not borrowed from the markets.
“Second, there are a number of frontier countries that have borrowed in the markets and from other sources but they’re struggling because refinancing costs are very high. We are particularly worried about countries that have bonds coming due in the next 18 months. For example, Egypt, Tunisia, Ethiopia and Kenya.
"Third, we have a few emerging markets, including South Africa and Morocco, which are doing slightly better. Their biggest challenges tend to be domestic, about how they can speed up growth, but generally they can finance themselves. If they want to come to markets, they can – it’s just a little bit more expensive than it had been in the period 2017 to 2019.”
Economists say that one of the main factors behind Africa’s worsening fiscal position has been an increase in state subsidies. Senegal's fuel and electricity supports gobbled up 4% of GDP during 2022, while Nigeria spent US$10bn capping the price of petrol. Angola spent Kz1.9trn (US$2.3bn) on fuel subsidies in 2022, which is more than 40% of what the IMF estimated it spent on social programmes.
“Many sub-Saharan countries subsidise food products and fuel imports,” said Isaac Matshego, an economist at Nedbank.
“The Russia-Ukraine war has resulted in an increase in the cost of foreign subsidies and food subsidies, and that is having a significant impact on total expenditures. The debt situation across the sub-continent is quite tough at the moment. We have already seen Zambia, Ghana and Ethiopia use the G20’s debt restructuring framework. When you go back to the 2004–2006 period, the debt restructuring then was related to official debt, external debt by the IMF, the World Bank and bilateral creditors. This time round, the difficulties relate primarily to commercial debt, particularly Eurobonds.
“Private creditors have to make concessions by extending the debt. They are quite reluctant to take significant haircuts. For example, there is no doubt in my mind that Kenya will be able to meet its US$2bn Eurobond repayment maturing in mid-2024 but the structure of the debt means that its debt service repayments absorb a very large proportion of fiscal revenue, close to 25%. That is just not sustainable.”
IMF/World Bank support
The IMF supports African nations primarily in three areas: policy advice, technical assistance and financial support. The IMF technical assistance focuses on pivotal macroeconomic policies, with roughly 80% targeting low and lower-middle-income countries, predominantly in sub-Saharan Africa.
The fund has financial support programmes with 25 sub-Saharan African countries. Since the onset of the pandemic, it has disbursed US$33bn for emergency aid, programme support and debt relief. On top of this, the 2021 US$23bn special drawing rights allocation has strengthened the region’s financial position, underpinning vital social expenditures. Following the SDR allocation, international reserves of low-income countries in sub-Saharan Africa were bolstered by 40% on average. Overall, the IMF has provided more than US$50bn to the region since 2020.
Meanwhile, the World Bank is helping African countries to cushion the blow on the poorest households and set African food systems on a more resilient and productive pathway. The bank remains the largest financier for climate action, which reached US$22bn in 2022 – of which about US$10bn was destined for Africa.
“Africa’s needs are enormous,” said Mahesh Kotecha, president at Structured Credit International Corporation, a New York-based financial advisory firm. “It is the least developed continent, although parts of it are doing better than others. Its need for infrastructure and other financing are enormous and there are climate mitigation and adaptation expenses as well.”
Some economists argue that one of the factors holding back the region’s economic development is the ‘African premium’, an over-inflated risk perception assigned to the region by the international credit ratings agencies. They even argue that the continent should have its own Africa-based, Africa-focused agency that covers every country.
“I think many of claims made about the so-called ‘African premium’ – in the order of 300bp – fail on a number of grounds,” said Kotecha. “First, they often compare ratings of, say, Tunisia and Greece, but they are two notches separate in the ratings. They should compare exactly the same ratings. Furthermore, they do not compare exactly the same maturities and they do not compare similar liquidity spreads. Greek bonds can be bought by the European Central Bank, while there is no such central bank serving the whole of Africa.
“Second, sometimes they compare spreads in 2005, say, with spreads in 2009. It’s hocus-pocus. When you take all this away, the question is: is there a real spread? The answer is yes, there is an African premium but it’s not what it’s cracked up to be. Maybe it’s 70bp–100bp.”
Many African countries have repeated the same mistake they made 30 years ago by becoming too indebted again. Debt service is gobbling up a very high proportion of government revenue. Many require some kind of debt restructuring to bring the debt level down to a sustainable path. They also require strong economic growth, so that their poverty-reduction effort is much greater.
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