Why the success of African sovereign debt is considered worrying

Audio 3:45

By: Dominique Baillard Follow

African states are increasingly turning to international markets for borrowing. It has even become one of the drivers of over-indebtedness in sub-Saharan Africa.

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Since the start of the year, bond issues denominated in euros or dollars have been linked on the continent. Gabon thus raised a billion dollars, Ghana 3 billion dollars, Benin has just announced that it wanted to borrow 500 million euros by the same channel. Its big neighbor, Nigeria, would like to borrow nearly 3 billion euros on the markets. The IMF has been alarmed for two years about the debt level of African countries. But these warnings did nothing to deter borrowers or investors. In the past two years, the volume of Eurobonds has exploded. It is one fifth of the total debt of African states. Twenty-one countries in sub-Saharan Africa are now using this type of borrowing.

Why this craze for the market?

Because the rates are more attractive than those offered by their usual creditors. Investors are very fond of this African debt. Western debt yields are currently very low, even negative, which is why they are rushing to the much more lucrative sub-Saharan bonds. The bond issued by Gabon was oversubscribed three times more than the amount requested, and that of Ghana five times more.

How are these loans risky?

The initial rate is attractive, but the issuer finds itself at the mercy of the market, because the debt is sold on the secondary market. Zambia's experience provides a glimpse of the risk: the dollar borrowing rate has almost doubled from 9% to 17%. Redemption can also be much more painful when the country's currency loses ground against the currency in which the bond was issued. Finally, the capacity of a State to repay also depends on the use made of the borrowed money. If it has been invested in a project that boosts the economy, this will benefit growth, and therefore improve tax revenue. On the other hand if the investment is a failure, it is the double penalty.

Failure to pay becomes a threat again?

The situation in certain countries is worrying. As in Zambia where the state devours all these foreign exchange reserves to meet debt service, or in Congo Brazzaville, where the release of IMF funds is still suspended. Or in Angola whose debt represents almost 100% of the GDP. The African Development Bank believes, however, that there is no risk of a systemic crisis in 2020, that is to say a possible contagion to the entire continent, or even beyond. And like the IMF and the World Bank, the AfDB finds that the level of public debt is worrying. Over-indebtedness is a global phenomenon, but it concerns Africa more than other regions, because the economies there are more fragile and because it is the region where the level of debt has risen most rapidly.

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• Economy Africa
• finances