- Rise in dollar debt pinches as commodity prices decline
- Countries may have a harder time tapping Eurobond market
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 world.
“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 in 2014 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 countries.”
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 4.8 percent to record 9.87 per dollar by 2:56 p.m. in the capital, Lusaka. The country can’t intervene to stop the rout because its foreign reserves, equivalent to 2.5 months of imports, are “not something to write home about,” Finance Minister Alexander Chikwanda said on Thursday.
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.”