September 3rd, 2015 6:52 am
Thanks to my friend Steve Liddy for forwarding this Bloomberg article:
Falling Currencies Raise Debt-Service Fears Across Africa (2)
2015-09-03 09:43:55.62 GMT
(Updates currency in fifth-last paragraph.)
By Paul Wallace and Chris Kay
(Bloomberg) — In the past decade, countries across Africa,
encouraged by surging commodity prices and a global appetite for
high-risk debt, sold dollar bonds to finance everything from
roads to railways to tuna-fishing fleets.
Now commodity prices have halved and African currencies are
tanking, making the bond payments tougher and raising the
possibility of a debt crisis on the world’s poorest continent.
The risk of such an outcome is denting the outlook for
countries from Ghana to Mozambique. Africa in recent years
boasted most of the world’s fastest-growing economies and lured
investors hungry for assets yielding more than those in the rich
“There’s certainly been a turn in sentiment around Africa,”
Giulia Pellegrini, a sub-Saharan Africa economist at JPMorgan
Chase & Co., said from London. “There is a perception, in some
cases grounded in reality, that some African countries have been
borrowing rather quickly. Weaker exchange rates make it harder
for them to service their debts.”
Investors don’t have to look far back to find emerging-
market crises brought about by too much foreign debt. Asia’s
financial turmoil of 1997 and 1998 was triggered by Thailand’s
baht tumbling, making the country’s foreign debt unpayable.
Mexico in 1994 and 1995 was caught short when a peso devaluation
raised payments on its dollar-linked bonds.
Not all African countries have overloaded on debt. Nigeria,
Africa’s biggest economy and oil producer, had external debt
equivalent to less than 2 percent of gross domestic product last
year, while its ratio for overall borrowing, including in local
currency, was 10 percent, according to Standard Bank Group Ltd.
For the region as a whole, total government debt amounted to 30
percent of annual output, compared with 41 percent for emerging
markets, according to the International Monetary Fund.
“Sub-Saharan Africa is still among the least-indebted
regions in the world, probably the least indebted,” said Jan
Dehn, head of research at London-based Ashmore Group Plc. “In
general, debt is not a concern.”
Still, of the region’s roughly 50 countries, the 16 that
have issued Eurobonds — foreign currency bonds typically
denominated in dollars — may be among the most vulnerable.
Ghana, whose main exports are gold and oil, has seen its
foreign debt ratio more than double to 38 percent since 2006,
the year before it sold the first of its $2.75 billion of
Eurobonds. Senegal’s borrowing levels are now higher than when
the west African country was given relief under the Heavily
Indebted Poor Countries Initiative, or HIPC, 10 years ago. And
Mozambique, which issued a dollar bond for the first time in
2013 when state-owned tuna company Empresa Mocambicana de Atum
SA borrowed $850 million, said in June it needed to restructure
the security because it was too expensive.
Rising concern about sub-Saharan Africa means countries
that have signaled plans to tap the Eurobond market this year,
including Ghana, may find it tough to win over investors. Dollar
bonds from the region have lost 3.8 percent this quarter, the
most among emerging markets.
Yields have soared. Those on a $1 billion security due in
April 2024 for copper-rich Zambia rose to 10 percent for the
first time in August. Ghana’s dollar yields climbed above 10.5
percent for the first time since December, while Nigeria’s
reached 8.5 percent, more than 300 basis points above levels in
May. That compares with an average yield of 5.1 percent for
emerging-market dollar-denominated government debt, according to
data compiled by Bloomberg.
“Investors are less and less likely to have appetite for
Africa’s debt, in light of what’s happening now,” said Rick
Harrell, an analyst at Boston-based Loomis Sayles & Co. LP,
which oversees $240 billion. “I’m really worried about some
countries,” including Ghana and Zambia, he said.
Falling local currencies are adding to the pressure by
making it more expensive for countries to repay external bonds.
Ghana’s cedi, Zambia’s kwacha and Mozambique’s metical have all
weakened more than 15 percent against the dollar this year.
Investors are concerned that slowing growth in China will
depress prices of commodities from oil to copper, and about the
first hike in U.S. interest rates since 2006. That would draw
capital out of emerging market assets.
Sub-Saharan Africa’s growth will be 4.2 percent this year,
down from 4.6 percent last year and 5.7 percent in the first
decade of the 2000s, the World Bank said in a June report.
“Debt-to-GDP ratios for the countries with increased bond
market access have picked up in recent years,” the bank said.
“While debt burdens remain manageable, continuing currency
depreciations against the U.S. dollar could lead to a rapid
increase in the value of foreign-currency debt for these
Some nations have already called on the IMF for help. One
was Ghana, which agreed to an almost $1 billion loan with the
Washington-based lender in February. West Africa’s second-
largest economy came unstuck after the government ramped up
borrowing to cover budget deficits caused by salary increases
for public workers and falls in commodity exports.
Others may have to follow suit if commodity prices don’t
rebound, according to Pellegrini.
Zambia’s central bank warned on Aug. 28 that the kwacha was
“under immense pressure” because of the falling price of copper,
from which the southern African nation derives 70 percent of
export earnings. The government has so far ruled out an IMF
loan. The kwacha dropped 4.2 percent to 9.7922 per dollar, a
record, by 11:36 a.m. in the capital, Lusaka.
Loomis’s Harrell says investors may have to prepare for
another round of restructurings similar to HIPC. The
negotiations would be more fraught this time, given the
involvement of Eurobond investors, he says. Previously, African
governments were negotiating almost solely with development
institutions such as the World Bank and the IMF.
“If a restructuring occurs, it will definitely include the
private sector and it will make it more complicated,” Harrell
said. “Private investors would have to take some losses.”
Prospects for governments in the region with plenty of
dollar bonds are hardly positive, says Andreas Kolbe, head of
emerging market credit strategy at Barclays Plc.
“Overall debt levels, and external debt levels, are rising
in most countries in Sub-Saharan Africa,” he said. “There are
only very few exceptions. That’s a concern, particularly in the
current global macroeconomic environment. It could make access
to financing more difficult.”