The domino effect of five central banks - Denmark, Switzerland, the European Central bank, the bank of Japan and more recently Sweden, slashing interest rates to sub – zero levels has certainly given many the chills. Viewed as a desperate move to stimulate growth by rewarding spending and penalizing savings – it is in fact more related to the unsustainability of public expenditure modelled for a demographic curve that is no longer there. An ageing population whose workforce is weak and has low productivity is coming to surface. The world seems to be gripped with the psychological fear of another looming global debt crisis. This is hardly surprising. Analysts and political leaders refuse to discuss population trends because the reality is very difficult to reconcile with populism and short term expediency.
In the last decade growth seem to be shifting to emerging economies, but all of the sudden the BRICS, with one exception, India, got engulfed in the same patterns as those they rivalled. It is no coincidence they too, with precisely the Indian exception are facing a diminishing of their labour force in the near future.
Yet in this whirlwind, growth will have to come from somewhere. Africa’s growth has been driven by investors seeking high returns and opportunities rooted in a number of mega trends. These include a sizeable number of consumers, that will be almost as large as the Americas and Europe population combined by 2025; a rising middle class coupled with a rapid urbanization with eager consumers expected to spend about USD1 trillion by 2020; and a young population that will constitute over a quarter of the world’s labour force by 2050.
In addition to reforms, Africa’s financial sector has also matured wetting the appetite for sovereign bonds – now at the center of the continent’s debt sustainability discussion. This trend in particular has created the buzz about another debt crisis looming in Africa. When we talk of debt sustainability, the agreed definition is whether a country can meet its current and future debt service obligations in full, without recourse to debt relief, rescheduling or accumulation of arrears.
It is important to give some context with regards to Africa’s past indebtedness. Contrary to common perception, Africa's past over-indebtedness was not solely attributable to the continent’s poor governance, corruption or conflict, as most would have you believe. Other contributing factors include cold war geopolitics; relatively poor fiscal policies and negative real interest rates in industrial countries, which in turn encouraged developing countries to go on a borrowing spree; as well as easy credit access, particularly to oil-exporting countries, that in hindsight seemed to be helping industrial countries adjust to the two oil-shocks of the 1970’s. A long drawn global recession caused commodity markets and prices to collapse. Volatile exchange rate movements saw Africa's debts appreciated against the US dollar. Adding to this potent cocktail, protectionist policies in the world's markets stood in Africa’s way to escape the debt trap. With onerous debt service burdens, a vicious cycle began: African countries taking on new loans to repay old ones. More was actually being spent on servicing debt than any other expenditure or investment category. By 2012, African countries were still spending about 10 percent of their export earnings on servicing external debt, an improvement from the 40 per cent plus of the 1990s.
Interestingly, the continent’s total external debt as a percentage of GDP has actually been declining in Africa since the Monterrey consensus of 2002 that launched debt relief through the Heavily Indebted Poor Country (HIPC) scheme, and the Multilateral Debt Relief Initiative (MDRI). Together they helped 35 African countries cancel USD100 billion of external debt.
Africa's total foreign debt has been higher than 30 percent of GDP since 2010 and it was projected to have risen to 37.1 percent by the end of 2015. However, net foreign debt as a share of GDP is only 1 per cent, having been negative since 2006 because of Africa’s international reserves1. For example, net foreign debt as a share of GDP in Algeria has averaged -82.3 percent since 2010.
With regards toAfrica’s total public debt-to-GDP, figures have hovered above 30 percent of GDP since 2006 and with gradual increases taking place between 2010 and 2014. Even then, it is still lower than recorded in previous decades standing at 38 percent as of 20142 . This debt level is also comparable to other developing countries and is well below that of advanced economies. For example, the total debt for OECD countries was nearly 80 percent of the OECD GDP in 2008 and was expected to grow to 111.2 percent in 20153. The champion of debt is Japan with GDP/debt ratio of 230 percent.
So why is the talk of debt pressure coming from?
Prior to 2009 sovereign bonds issued by African countries were negligible. The current stock is over USD18 billion. This amount actually is not reflective of incompetent governments building up unsustainable levels of debt but rather reasonable borrowers taking advantage of low interest rates to finance growth. The bad move was to not take into account the volatility of the exchange rates and currency markets. African governments are expected to experience up to USD10.8 billion in losses or the equivalent to 1.1 percent of the region’s GDP on sovereign bonds that they issued in 2013 and 2014, due largely to exchange rate risks.
Changes in macroeconomic fundamentals, such as a collapse in commodity prices, can also affect sovereign debt significantly4. Sovereign debt is driven by advanced and powerful economies asynchronous monetary policies. Defaulting is always risky – while governments may forgive debt, private investors certainly don’t; conditions are more stringent to meet maturity deadlines. There is no coherent mechanism to govern any future sovereign debt crises. Creditor specific mechanisms used to facilitate past debt restructurings are no longer available. Although a sovereign debt restructuring mechanism was proposed by the IMF more than a decade ago, there is still no international agreement on the topic to date. There is a general consensus that the existing rules are too creditor-friendly, but that a push for an international agreement that is too borrower friendly might not be the best way forward. Any global agreement should therefore strike the right balance5.
The bottom line is that debt will be exacerbated in countries with weak fiscal discipline and for those who over borrow and pay little attention to repayments. Individual governments must build debt management capacity and be held accountable for the effective use of borrowed funds. This includesassessing any expansion in borrowing within the context of a comprehensive medium-term strategy for sovereign debt management.
Finally there is need for flexibility in placing debt ceilings and assessing debt. African countries should not be over-constrained or unduly deprived. The issue of debt sustainability will essentially depend on a comprehensive treatment of all components of debt in a debt restructuring, and the provision of clear mechanism to engage all stakeholders to build up consensus on how to close the gaps in financial architecture. This is going to be difficult for rich countries to accept. It requires facing the real structural problems they have through ageing.
If the answer is to pay the banks to keep the money, OECD countries will show they don’t believe in the future. Africa does not have that luxury.
This article was published in French online in NotreAfrik magazine of 23 February 2016
1 Economic Commission for Africa (2015). Industrializing through trade. Addis Ababa, UNECA.
2 Data set from EIU, 2016
3 Global finance magazine-
4 Hilscher, J. and Y. Nosbusch (2010). Determinants of Sovereign Risk: Macroeconomic Fundamentals andthe Pricing of Sovereign Debt, London School of Economics, UK.