Africa Turns to IMF as Commodity Slump Exposes Poor Policy

  • Borrowing costs shutting countries out of capital markets
  • Many nations swimming against a tide of debt, RMB says

Less than two years after International Monetary Fund Managing Director Christine Lagarde heralded Africa for its “remarkable resilience,” some of the continent’s former brightest stars are seeking bailouts.

Ghana and Angola have turned to the IMF for help in the past year, as has Mozambique, which Lagarde had said epitomized the new “positive spirit” on the continent. Zambia may soon be forced to follow suit, Kenya took on a $1.5 billion standby facility and Nigeria, Africa’s biggest economy, is negotiating a $1 billion loan from the World Bank. Zimbabwe is also engaging with the Washington-based lenders to obtain fresh credit.

High yields are shutting nations on the continent out of international capital markets at a time when fiscal and current-account deficits are widening. After commodity prices fell to 17-year lows in January, sub-Saharan Africa’s economic growth will probably decelerate to 3 percent in 2016, the slowest pace in more than ten years, and below the global rate of 3.2 percent, the IMF said on Tuesday. Four years ago, the region’s economy expanded by more than 5 percent annually.

“These countries have had to go cap in hand to the multilaterals for the simple reason that their economies have had the rug pulled out from under them,” Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd., which advises asset managers, said by phone on Wednesday. “It’s revealed the severe structural and institutional shortcomings of many of these economies. Many never saved for a rainy day and now it’s sheeting down.”

African governments, buoyed by rapid growth and bullish sentiment among investors, pushed to end their reliance on the IMF and World Bank over the last decade by tapping global capital markets for the first time. Since 2012, countries including Zambia, Angola, Cameroon, Mozambique and Ethiopia sold their first dollar bonds and yields were at historic lows and demand plentiful.

Rising Debt

Borrowing costs have since surged with investors fretting about rising debt and the ability of African economies to weather the slump in raw-material prices. Average yields on sub-Saharan sovereign dollar bonds were 7.61 percent at the end of March, almost 300 basis points higher than three years ago, according to data compiled by Bloomberg. By comparison, average yields on emerging-market dollar debt have climbed 45 basis points to 4.67 percent in that period.

“The one factor that really went wrong in recent years was that, with easy money available because of globally low interest rates, and investors chasing higher returns, insufficient attention was paid to the quality of economic policy-making,” Razia Khan, head of Africa research at Standard Chartered Plc in London, said in an e-mailed response to questions. “We’re now seeing, with the turn in the cycle, that the quality of economic policy-making does in fact matter.”

The IMF is ready to offer support to Nigeria if the country asks for it, Lagarde said during the fund’s spring meetings in Washington on Thursday. On Friday, Nigerian Finance Minister Kemi Adeosun and her Rwandan counterpart Claver Gatete will take part in a discussion at the gatherings about whether sub-Saharan Africa is going through a temporary slowdown.

Chinese Funding

While some nations, including Nigeria and Angola, Africa’s biggest oil producers, are negotiating funding with China, Beijing is more interested in lending for specific infrastructure projects than bailouts, according to John Ashbourne, an economist at London-based Capital Economics Ltd.

“China is not in the business of propping up African states with significant economic problems,” Ashbourne said. “When things go wrong, there are very few organizations that can lend billions in a short period. There’s no one to replace the IMF.”

Investors tend to react positively when countries that are in trouble seek IMF assistance because it often leads to governments bringing their spending under control, according to Nema Ramkhelawan-Bhana, an analyst at Rand Merchant Bank in Johannesburg. Ghana’s cedi has stabilized since it announced a $918 million three-year loan with the IMF in April 2015, after having dropped almost 30 percent against the dollar in the previous year.

“Many sovereigns are swimming against a rising tide of debt,” Ramkhelawan-Bhana said by e-mail. “A failure to enact structural reforms in a timely and efficient manner will force governments to increasingly turn to the IMF for technical assistance.”

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