African Borrowing Levels Surge Anew

Sub-Saharan Africa is in danger of sinking back into the level of indebtedness that led the west to write off tens of billions of dollars worth of borrowing earlier this century.

Between 2000 and 2011, the median ratio of general government debt to gross domestic product of 18 major sub-Saharan countries fell from 80 per cent to 30 per cent, according to data from Fitch Ratings, thanks to a wave of debt forgiveness and restructuring under the “heavily indebted poor countries” initiative of the IMF and the World Bank.

Ethiopia, Cameroon, Angola and Ivory Coast alone were excused $20bn of debt principal between them, according to data collated by Fitch.

As a result, the median debt servicing cost of the 18 countries tumbled from 14.4 per cent of government revenues in 2001 to a low of 4.8 per cent in 2011.

However, a fresh wave of borrowing by sub-Saharan nations has this year pushed average debt to GDP ratios back above 50 per cent for the first time since 2005. This figure is likely to hit 51.4 per cent this year and 53.3 per cent in 2017 in the 18 countries rated by Fitch, the agency says, as shown in the first chart.

Debt servicing costs have also risen sharply, despite the concessional nature of almost two-thirds of the fresh lending (stripping out loans to South Africa) and an era of low global interest rates. They are likely to reach 9.1 per cent of government revenues this year, the highest level since 2004, and 9.9 per cent in 2017, Fitch says.

“Caution is really needed now [in terms of debt ratios]. There is no clear trend of stabilisation,” said Jan Friederich, a senior director in the sovereigns and supranationals group at Fitch.

“It is a concern,” said Yvonne Mhango, sub-Saharan economist at Renaissance Capital, an emerging markets focused invested bank, who argues that part of the reason sub-Saharan Africa sailed through the global financial crisis of 2008-09 largely unscathed was its low debt levels.

However, Ms Mhango said many African countries were now having to battle a separate crisis caused by low commodity prices while also coping with an increased stock of debt.

“We have seen countries delay fiscal consolidation at a time when it should be a priority,” she added.

Mr Friederich said there were two drivers behind the rise in African debt levels: the commodity slump, which had led to a “sharp decline in fiscal revenues among exporters”, and a reliance by some countries on infrastructure investment to fuel economic growth.

In September, Ghana sold a $750m Eurobond that will be partly used to fund capital projects, even though the government’s debt servicing cost-to-revenue ratio, at 27.7 per cent, is already the highest among the 18 sub-Saharan countries rated by Fitch, as the second chart shows.

Central government capex will exceed 10 per cent of GDP this year in Rwanda, Uganda, Lesotho, Mozambique and Ethiopia, according to Fitch.

But although debt-funded infrastructure investment “will help remove constraints on long-term growth,” Mr Friederich said, “its benefits may not fully materialise until governance and business environments improve”. As a result, the “near-term impact on sovereign debt ratios will be negative”.

“These countries really should have better roads, bridges, schools, all kinds of infrastructure. But the problem is that the return on these investments in terms of GDP growth isn’t strong enough to stabilise the debt ratio,” he added.

In reality, overall public spending on infrastructure is likely to be higher still than the official data suggest, given that some of it will be channelled through state-owned enterprises.

In other countries, like Ghana, the problem is excessive use of debt to fund government payrolls.

Elevated debt servicing costs, which already account for more than 10 per cent of central government revenues in Nigeria, Zambia, Kenya, Uganda, South Africa and Gabon, as well as Ghana, are likely to be storing up further problems.

“Rising debt servicing costs are an obstacle to fiscal consolidation among sub-Saharan African sovereigns, and larger or unchanged deficits will lead to further increases in public debt, pushing debt ratios higher,” Mr Friederich said.

Fitch forecasts that the debt/GDP ratio will increase in each of the 18 countries covered by Fitch, bar the Seychelles, between 2012 and 2017. The largest increases are expected to be in Mozambique (60 percentage points), Zambia (37pp) and Cape Verde (36pp), as the last chart shows.

Ms Mhango shares many of these concerns, warning that “the outlook doesn’t look good for certain countries whose revenues predominantly come from commodities that are forced to borrow to meet their obligations”.

She pointed to Kenya, where the budget deficit has equalled or exceeded 8 per cent of GDP for the past two years and where a pledge to the IMF to slow spending increases has so far not been matched with action, and Zambia, where the deficit is also above 8 per cent and where “now elections are beyond us, we would like to see more effort to sort out the budget and bring down the wage bill,” as potentially problematic.

Others are more sanguine. While John Ashbourne, Africa economist at Capital Economics, said the rise in debt loads “is not good news by any stretch of the imagination,” he did not view it as a major concern.

“I don’t think this is a big problem for sub-Saharan Africa. The numbers involved are pretty small,” he argued, albeit with a handful of exceptions such as Mozambique.

“For Africa as a whole, this isn’t one of the big things to worry about. There are other things that are going wrong that are more important,” said Mr Ashbourne, who lamented that economic growth, forecast by the IMF to be just 1.4 per cent this year, is not only too weak to reduce poverty, but will result in a decline in per capita GDP.

“Things are really quite radically different to what they were in the 1980s and 1990s. I think a return to the bad old days of debt defaults is very unlikely,” he said.

Some might also argue a focus on Africa’s fiscal problems is unfair, given that debt-to-GDP ratios are far higher in the developed world, at 91 per cent in the eurozone, 104 per cent in the US and 229 per cent in Japan in 2015, compared with 11.5 per cent in Africa’s largest economy, Nigeria.

Mr Ashbourne dismisses this argument, however, arguing that it is harder for African states to borrow than it is for developed world ones, and that the generally smaller size of the state in African countries means their debt/government revenues ratio is higher than it would be in a developed country with a comparable debt/GDP burden.

Ms Mhango agrees, arguing that it is the proportion of government expenditure that goes towards financing debt that is “worrying”, not the size of the debt burden itself.

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