African public debt: Why another debt relief?
A focus on Eurobonds
Amidst the COVID-19 pandemic, leaders in Sub Saharan Africa (“SSA”) sparked a new debate on public sovereign debt. Some of the world’s biggest lenders including the World Bank, the International Monetary Fund (IMF), the G20, the African Development Bank and all Paris Club creditors approved a debt service relief package for more than 25 Sub Saharan African countries a. For a continent where most countries report debt-to-GDP ratios over and above the threshold set by the IMF and African Monetary Cooperation Program (AMCP) b, one may simply conclude that a debt relief may be an end to the debt woes faced by African governments.
While many believe alleviating the payment terms and cancelling some debt is necessary especially during a pandemic, other African countries have been reluctant to accept debt relief packages. To this end, besides Cameroon, Côte d’Ivoire, Ethiopia and Senegal, other SSA governments, although eligible to receive debt relief accommodations as of today, have not elected to accept the debt relief package or any form of debt moratorium from lenders c.
Debt relief initiatives are no new conversations in Sub Saharan Africa. For example, in 2005, the G-8 suspended $40 billion in debt for many African countries d under the Multilateral Debt Relief Initiative (MDRI). The MDRI called for “the cancellation of 100 percent of the claims of three multilateral institutions -- the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF)” for then Highly Indebted Poor Countries (HIPIC) e. Yet, fifteen years later, countries that received debt relief in 2005 are still facing the same debt related issues. What are the recurring factors that lead African countries into this unending debt crisis?
To kick off our series on the impact of public debt in Francophone West African countries, we chose to explore the factors inducing a debt crisis that SSA countries have been facing for quite a long time. This article will focus mainly on the factors pertaining to the eurobond market.
The introduction of SSA countries to the eurobonds market allowed African nations to diversify their financing portfolio but also exposed them to new risk
The Cost of Borrowing
Most SSA countries facing capital shortages often borrow from multilateral agencies, from other nations such as China, and increasingly from capital markets through the use of eurobonds. The Seychelles islands were the first African nation to penetrate the eurobond market in 2006 and were quickly followed by Ghana in 2007 and later Tanzania and Zambia who were welcomed on the market with overwhelming demand. The introduction of SSA countries to the eurobonds market allowed African nations to diversify their financing portfolio but also exposed them to new risk, and in some cases a sharp increase of borrowing costs.
The borrowing cost is highly correlated with the global economy. A study conducted by Cytonn Research f has shown that as of Q1 2020, eurobonds issued by SSA countries yielded on average 6% more than in Q4 2019. In other words, the COVID-19 pandemic has increased the average borrowing cost by 6% in just 3 months. Led by its default histories, Zambia saw the greatest impact, with the eurobond rate and yield increasing by 38% and 20%, respectively.
Additionally, affected by economic slowdowns, SSA countries may face very different implicit foreign currency exchange rates (as they list eurobonds in foreign currencies), leading to higher debt repayments in local currency. Some countries like Senegal chose to issue some notes in Euro to hedge the foreign exchange risk, as the euro is pegged for west African CFA.
As commodity prices plunge; they impact the economic outlook of the region ... subsequently increases cost of borrowing for SSA countries
Over-reliance on oil and other commodities
According to a study by Gevorkyan and Kvangraven (2016) g, the driving factors of SSA countries' eurobond yields are mainly commodity prices, global financial market uncertainty and US interest rates. Another study by Presbitero h also found that low income countries tend to issue on the eurobond market as US interest rates are low and commodity prices are high.
Therefore as commodity prices, especially oil prices, plunge; they impact the economic outlook of the region on the eurobond market which subsequently increases cost of borrowing for SSA countries. The main cause of this correlation is the continent’s heavy reliance on commodities.
For example, the recent discoveries of oil and gas in Senegal bolstered investor enthusiasm over Senegalese eurobonds as the country issued 1 billion euros of 2028 notes that yielded 4.12% in 2019 i; a historically low cost of debt for a country in the region on the eurobond. This reliance on commodities is not always in favor of SSA governments as they usually do not have much control over global commodity prices. Unfortunately, they tend to position themselves on global markets as commodity wholesalers that hardly influence commodity prices.
Other countries like Benin, however, are betting on GDP performance and good debt management to lower their interest rates. Such countries, namely the ones betting GDP growth and debt management strategies, according to a study by Senga, Cassimon and Essers j, have more control over their interest rates on the eurobond market. Recently, these countries have been the most reluctant to accept debt relief packages as they rely on their debt management to borrow at a low cost in the future. The Finance Minister of Benin was the first African Finance Minister to write an op-ed opposing debt relief measures in the wake of the economic fallout of COVID19 in April 2020, expressing fear of the driving cost of borrowing higher and lowering Benin’s credit rating k.
Senegal for example saw its borrowing cost drop from 8.5% in 2011 to 5.7% in 2013
What does the future hold?
While it is still uncertain whether more countries will elect for the debt relief measures, it is safe to conclude that electing for such relief could significantly impact the terms of the eurobonds offered to those countries. The bond market has been traditionally sensitive to the outstanding loan balances, credit ratings, as well as the political & economic outlook of the borrowing entities. Senegal for example saw its borrowing cost drop from 8.5% in 2011 to 5.7% in 2013 l as the country demonstrated a more stable political environment. Unlike the big debt relief some SSA countries received in 2005 while they were not yet on the eurobond market, it would be surprising to see the current economic climate not influence their borrowing cost.
Although an important component to the debt crisis SSA countries are facing, eurobonds are not the only driving factors of this debt crisis; in our next issue we will analyze other recurring trends that brought this crisis about.
a - "Why African countries are reluctant to take up COVID-19 debt relief" https://theconversation.com/why-african-countries-are-reluctant-to-take-up-covid-19-debt-relief-140643
b - "Is a debt crisis looming in Africa?"
c - "Why African countries are reluctant to take up COVID-19 debt relief"
d - "Industrial countries write off Africa's debt"
e - Multilateral Debt Relief Initiative — Questions and Answers
f - Sub-Saharan Africa (SSA) Eurobonds: Q1’2020 Performance
g - Assessing Recent Determinants of Borrowing Costs in Sub‐Saharan Africa
h - Sovereign bonds in developing countries: Drivers of issuance and spreads
i - Senegal Plans 2020 Eurobonds as Debt Costs Decline to Record
j - Sub-Saharan African Eurobond yields: What really matters beyond global factors?
k - [Tribune] Covid-19 : pourquoi l’allègement de la dette africaine n’est pas la solution
l - Senegal taps bond market for another US$500m