Benoît Chervalier is an investment banker, teaching at Sciences Po Paris and at Essec (Higher School of Economic and Commercial Sciences). Specialist in debt and financing issues ...

"The Paris summit aims to launch an international dynamic"

French President Emmanuel Macron.

Reuters

Text by: Olivier Rogez Follow

11 mins

Benoît Chervalier is an investment banker, teaching at Sciences Po Paris and at Essec (Higher School of Economic and Commercial Sciences).

A specialist in debt and financing issues in Africa, he advises governments and companies on this subject.

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RFI: France is organizing an international summit on financing and debt issues in Africa. French President Emmanuel Macron is also proposing what he calls a

New Deal
to Africa. What should we understand behind this expression?

Benoît Chervalier:

It is a rather overused term, but the message is clear, it is a question of providing a response of a political, economic and financial nature allowing the continent to recover from the pandemic crisis and to build Africa from tomorrow.

But, in my opinion, that does not mean that there will be hundreds of billions that will be allocated by mature economies to African countries.

It would be a mistake to believe it.

The central question is rather how to mobilize the private sector which alone could deploy the hundreds of billions of dollars that the continent needs for its growth and emergence.

Should we expect spectacular announcements on aid to African economies?

This summit is in a way a hybrid summit, it is neither a G20 summit nor a summit of an international organization, but an intergovernmental summit where some states will be present and others will not. It will therefore be more of an opportunity to reaffirm ambitions and give impetus which will then be translated into actions in the appropriate institutions. The great powers will agree on certain principles. This meeting is above all a response to this imbalance that we have seen appearing between the advanced economies and the others. There is indeed a colossal gap between what mature economies have been able to mobilize to support their economies during the pandemic, these famous stimulus plans representing more than 15 trillion dollars,and what the less developed countries have been able to do. A strong political signal should therefore be sent to Africa. A signal of solidarity.

The summit will come back to the allocation of SDRs (Special Drawing Rights) announced a few months ago by the IMF.

Is this the solution to allow Africa to have funds for economic recovery?

We must first salute

the first victory of the IMF

which was to have this new SDR allocation of 650 billion dollars accepted for its 183 members. Each by receiving a part according to its quota to the IMF. I remind you that this victory was made possible by the lifting of the American veto, the day after the election of Joe Biden to the presidency. Last March, the IMF began discussions, and the IMF's Executive Board must now validate the decision by the end of June, for a possible allocation during the month of August. What is to be emphasized is that a number of rich countries are not going to use their quota of SDRs, and all the current discussion revolves around the idea of how to use these unused rich country SDRs. to allocate them to low-income economies.

The solution that seems to hold the line is to use the IMF's Poverty Reduction Trust Fund (PRGT) which would benefit from a loan of part of the SDRs allocated to advanced economies to direct them to countries. the least developed.

The final amount is expected to be between $ 20 billion and $ 40 billion for African countries.

Additional mechanisms could also intervene, targeting the private sector or certain sectors or specific themes such as the financing of actions in favor of the preservation of the environment, but each option must be evaluated with its advantages and disadvantages.

The stated goal is to help without re-indebting.

How do you get there?

First of all, it would be wrong to think that only Africa is facing recurrent debt. I remind you that historically almost all countries have defaulted on their debt, including France and Germany. We must wring our necks at the idea that there is an African singularity in terms of debt. What is true is that some countries, and we are not talking about all of Africa but only certain countries, because of their characteristics are more fragile than others. Second point, the pandemic did not create the current situation, it only made it worse. The difficulties in some countries came after the oil crisis of 2014, when crude prices fell sharply in June 2014. Oil-exporting countries were the first to be affected,from Algeria to Congo-Brazzaville via Nigeria. They found themselves faced with high debts. The continent's public debt thus fell from 32.1% of GDP in 2010 to 65% in 2020. Third, from

new creditors have arrived in Africa

over the past decade. Countries like China, but also private lenders. Before 2010, only three African countries had recourse to capital markets, today there are eighteen. Eighteen out of fifty-four is therefore far from being the majority, and it cannot be said that the financial markets alone are responsible for the deterioration of Africa's indebtedness.

It should be understood that the debt does not affect countries in a homogeneous way.

We cannot globalize and put all countries in the same basket.

The vulnerabilities are different, so too are the types of creditors, and so will the solutions.

It will therefore be necessary for African countries to carry out a case-by-case analysis.

What the G20 countries have also decided to do by setting up the Common Framework through which three African countries have signed up to this mechanism (Chad, Zambia and Ethiopia) while finding themselves in a situation very different individual.

How to improve the conditions under which African countries borrow

First of all, the financing conditions, maturity, amortization, interest rates, vary according to the country and the nature of the loans requested. We do not have the same conditions if we issue international bonds, if we borrow on the domestic market, or if we borrow bilaterally from a foreign state. There is not a common hat. I would remind you that some countries have borrowed very attractively very recently on international markets. Morocco, for example, was able to borrow in September 2020 at a cost of 1.5% on one of its tranches. Côte d'Ivoire and Benin launched eurobonds in 2021 with a cost of around 4-5% depending on the maturities. So there are situations where the financing conditions are quite good and show investor confidence.

Beside, there are unfortunately countries which borrow more expensive, with 8% or more interest rate.

But it's like a borrowing business or household.

Interest rates reflect the risk that investors assess with regard to these countries.

In fact, the whole point is to reduce the average cost of financing when a country is in an intermediate range.

And there it is complicated.

Because, in fact, the risk premium makes it possible to attract investors who reason according to the risk-return linkage.

If this premium is not enough in their eyes, they will lend to others.

So what are the solutions?

The abundance of liquidity at the global level constitutes a powerful leverage effect today for the financing of these economies, but there is no single solution but a whole range that the leaders meeting in Paris will consider.

Among the mechanisms that will be put in place to allow the reallocation of SDRs, the possibility perhaps of having non-concessional loans backed by guarantee funds, and perhaps also and above all the way in which we could involve the sector. private.

When we see the situation of certain countries like the Republic of the Congo which is very indebted to oil traders, pledging a huge part of its resources in black gold, should we not prohibit or limit the use of pledged loans?

I don't think you can ban pledged loans. In principle, loans pledged on raw materials are not problematic, as long as they are well negotiated and well supervised. The first safeguard to put in place is to set up contracts negotiated in good faith, between partners in good faith based on

good governance.

and mindful of the long-term interests of the State. International actors, such as the ADB [African Development Bank, Editor's note] have deployed legal assistance tools [the African Legal Support Facility, ie ALSF], because they realized that countries were not always sufficiently equipped. to defend their interests in front of teams of experienced lawyers, and that it was necessary to support the States in the negotiations. The countries concerned would still have to request this type of assistance. However, not all of them do it, because this legal assistance presupposes respecting the rules of good governance and transparency ... It must be understood that to ensure that loans pledged on raw materials are balanced and beneficial for all parties,these rules of good governance and transparency must be respected.

One of the challenges of the summit is to find a way to further stimulate the activity of the African private sector to revive growth. What are the avenues that can be considered?

Here again, the possibilities are numerous. I'll just take one example, that of MIGA, the Multilateral Investment Guarantee Agency. It is an effective tool of the World Bank which makes it possible to guarantee those who lend to companies or to States and therefore to lower the cost of credit. But MIGA only intervenes when the countries have an international rating level equivalent to or higher than BB-, that is to say a fairly solid rating level. Concretely, only five African countries are eligible for MIGA. Perhaps one of the discussions to put on the table is to make this instrument accessible to more African countries.

Besides that, there are plenty of possibilities to explore to help support companies, and in particular mid-sized companies, which have a turnover of a few hundred million euros.

They are often forgotten in support programs which are often targeted primarily at SMEs and VSEs, yet they are often those which export the most, invest and create jobs on a massive scale.

Benoît Chervalier, investment banker, teacher at Sciences Po Paris and at Essec.

"The Paris summit aims to launch an international dynamic"

"The Paris summit aims to launch an international dynamic"

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