A decade after debt forgiveness, Africa still bending on dollars

LONDON When abounding countries wrote off billions of dollars of African debt in 2005, they hoped governments would consider twice about borrowing again in dear unfamiliar currencies.

Over a decade later, many sub-Saharan African countries still rest on U.S. dollar-denominated debt to financial their economies. Some investors contend this is sowing a seeds of destiny debt crises if internal currencies amalgamate and make dollar debt repayments some-more expensive.

Aside from South Africa and Nigeria, governments have not nonetheless finished adequate to rise collateral markets that would have authorised them to lift some-more income in their possess currencies, investors say.

United Nations trade physique UNCTAD estimates that Africa’s outmost debt batch fast grew to $443 billion by 2013 by shared borrowing, syndicated loans and bonds. But given afterwards pointy banking devaluations opposite a continent have pushed adult a cost of servicing this debt pile, that continues to grow.

“We all suspicion (Africa) was going to be a subsequent rising market. Governments should have been removing absolved of dollar liabilities and relocating into internal banking liabilities, that is what Brazil did 20 years ago and Mexico 30 years ago,” pronounced Bryan Carter, conduct of rising debt during BNP Paribas Investment Partners.

In 2007 Carter was confident adequate to reason a third of his account in sub-African internal debt. Now he has 0 bearing outward of South Africa, he said, adding: “They usually fell behind into a ‘original sin’ trap of borrowing in dollars.”

After a debt, due to multilateral organizations such as a International Monetary Fund, was wiped out, investors such as Carter were prepared to accept a risks of shopping internal banking bonds, in sell for aloft returns.

That would have authorised governments to run their economies, regardless of sell rate moves between a U.S. dollar and domestic currencies. Currency and seductiveness rates fluctuations have prolonged been a source of rising marketplace crises.

Stimulating internal bond markets, could have helped start a domestic resources and investment attention and also helped to revoke a faith on line exports – a vital source of a dollar income indispensable for debt repayments.


But there’s been tiny swell on a stairs indispensable to encourage internal debt markets – grant reform, acceleration targeting and creation currencies some-more flexible. Those markets that have emerged are tiny and with low trade volumes, a identical story to many African equity markets.

Data from Frankfurt-based index provider Concerto Financial Solutions shows 37 sub-Saharan African nations with superb internal banking debt of usually underneath $260 billion by end-2016.

Of that $146 billion is from Africa’s many grown economy, South Africa, while Nigeria accounted for $40 billion – a usually African markets large and glass adequate to validate for a GBI-EM index, widely used by rising debt investors

Concerto pronounced stripping out South Africa, 16 African countries have borrowed roughly $30 billion in holds given 2007. In addition, China has extended tens of billions of dollars in loans and some countries have new debts to multilateral lenders.

“While Africa’s stream outmost debt ratios now seem manageable, their fast expansion in several countries is a regard and requires movement if a regularity of a African debt predicament of a late 1980s and a 1990s is to be avoided,” UNCTAD warned final year.

Other rising markets in contrariety have shifted roughly wholly to borrowing during home. Debt denominated in rising currencies totals about $15 trillion, or 80 percent of a building world’s bond stock.


Investors do note some positives such as improved regulation, flourishing grant resources and longer 10-20 year bond tenors in many countries. Kenya recently sole a world’s initial mobile phone-based bond to typical adults

And Ghana final month auctioned $2.2 billion in cedi debt, a largest ever daily transaction in sub-Saharan Africa. The understanding captivated Michael Hasenstab, Franklin Templeton’s high-profile account manager.

A Ghanaian executive said, vocalization on condition of anonymity, a supervision would concentration this year on fluctuating a majority of domestic holds and would not emanate Eurobonds.

Zambian financial apportion Felix Mutati too pronounced he wanted domestic borrowing to be a initial pier of call in future, observant a 2017 bill was being financed mostly on domestic markets.

“The domestic market, we can't usually go and drop a bucket into it. It is a ethereal operation, a reason being that supervision borrowing can throng out a private sector,” Mutati told Reuters, when asked because a supervision had continued borrowing from overseas.

Some disagree outmost borrowing is pivotal in a early stages of a country’s development.

“The (foreign) borrowing has been invested in infrastructure projects that will expostulate growth….it is environment a bottom for destiny mercantile performance,” Rwandan executive bank administrator John Rwangombwa said.


There is no accurate information on volumes in internal markets. But Kenya, one of a bigger markets with some $12 billion value of Treasury bonds, trades a homogeneous of $16.5 million daily, batch sell information shows. South African holds trade $2 billion daily.

“Liquidity is never large adequate for offshore investors to unequivocally play in and out of a market,” pronounced Delphine Arrighi, a account manager during Old Mutual Global Investments.

But what is a headache for unfamiliar investors has critical consequences for countries and some are already apparent.

Lack of liquidity, clarity and hedging mechanisms minister to gripping internal borrowing costs high. And outmost debt ratios have soared as African currencies collapsed opposite a dollar from 2013. Zambian supervision debt has doubled given 2012 and three-quarters is in unfamiliar currency, adult from 40 percent behind then.

Ghana’s debt is over 60 percent of annual mercantile output, from 50 percent in 2005. Half is in dollars.

Mozambique’s debt default final year might be a initial of many, some fear [nL5N17P4CL].

“The debt of these countries has usually grown exponentially and so now they have no wish of removing there with possibly a new turn of debt service or default and restructuring,” Carter of BNPIP said. “The priority right now is that they positively contingency stop borrowing in dollars.”

(Additional stating by Duncan Miriri in Nairobi; Clement Uwiringiyimana in Kigali; Chris Mfula in Lusaka and Matthew Mpoke Bigg in Accra; modifying by Anna Willard)

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