Could the rise of ‘original sin’ condemn African governments once more?

Sid Verma
Published on:

The case against African sovereign bond issuance – from a moral and debt-servicing perspective – is too bearish but local FX depreciation represents a risk.

Emerging-market (EM) fixed-income investing in the 1970s and 80s centred on the old-school punt on political risk: buy sovereign debt for yield in countries where the ruler, more often than not, has a large statue of himself erected in the central square of the capital.

The result: a foreign-credit boom across Sub-Saharan Africa (SSA), followed by a synchronized bust between the 90s and early-00s. As many as 30 SSA governments saddled with large-scale foreign debts, incurred by former kleptocratic rulers, received multilateral-backed debt relief for as much as $100 billion in total, eventually paving the way for the continent’s much-touted economic resurgence.

By and large, this torturous debt history meant the mere mention of Eurobond issuance aroused political controversy. Though Ghana broke ranks in 2007, issuing a well-received $750 million 10-year deal, followed by Gabon that year, sovereign bond issuance was the exception rather than the norm.

In October 2007, for example, Nigeria’s former finance minister Shamsuddeen Usman told this reporter the country would snub Eurobond issuance due to the stigma, despite pressure from the debt-management office for offshore issuance to diversify sources of financing. “Whenever a government talks about issuing debt, Nigerians get scared,” Usman explained.

Fast-forward to 2014: Nigeria, Senegal, Zambia, Rwanda, Gabon and Namibia, sovereigns with mostly weak debt histories, have thrown caution to the wind, joining the ranks of international issuers, driven by a bid to access long-term dollar financing for infrastructure investments, diversify sovereign borrowing sources and establish benchmarks for corporates at a time of record global interest rates.

According to Dealogic, 2013 was a record year for SSA ex-South Africa dollar bond issuance with six deals totalling $4.3 billion, compared with $1.7 billion the year before and $1.5 billion in 2011. This scale is significant, according to the Overseas Development Institute (ODI), using its calculation of sovereign bond inflows at $5 billion in 2013, this is equivalent to 20% of aid to SSA and 12% of foreign direct investment inflows.

Source: ODI 

The aggressive pricing of Eurobonds even with a turn in the global commodities cycle and jitters over China confirm foreign-investor confidence in the continent’s domestic growth engines. Technicals are at play too. Specialist funds have had no choice but to pick up African credits given the dearth of relatively high-yielding dollar-denominated EM sovereign paper.

However, this flurry of issuance has sparked a backlash, with warnings over the moral hazard in financing governments, prone to corruption and economic mismanagement, and fears over debt-service capacity given rising aggregate sovereign debt burdens, the prospect tapering will trigger capital outflows from frontier economies and the risk local FX depreciation will increase foreign-debt servicing costs, dubbed the “original sin” risk.

For bookruners, both the moral-hazard and debt-servicing fears represent a reputational risk for their businesses, given the recent history of protests against both investors – seen to be demanding high rates of interests on developing-country bonds – and bookrunners in their capacity as facilitators of debt issuance for sovereigns for which there are question marks over repayment-capacity.

Michael Holman, the FT’s former Africa editor, is unequivocal about the risks. He writes: “...when investors buy bonds sold by sleaze-ridden governments, it is surely as dubious as giving a bottle of whisky to a known alcoholic. It is not against the law. But at best it is unethical and immoral, and the giver is complicit in the consequences.” Holman goes even further by arguing sovereign bond deals are a means of side-stepping the scrutiny and conditionality of multilateral lenders.

The recent history of African debt issuance is littered with bad omens: with war-torn Cote d’Ivoire restructuring its debt in 2011 after defaulting on its $2.3 billion 2032 bonds; in 2012, Gabon delayed a coupon payment, for the second time, on its 2017 paper; while in 2011, the Seychelles defaulted on its $230 million bond launched in October 2008, which represented a hefty 40% of GDP at the time.

Holman’s opinion-piece elicited a critical response from some quarters, citing the didactic and "Afro-pessimistic" tone.

Is this a moralizing tale from a westerner with undue credit given to the positive changes in debt metrics and public-financial management? After all, bookrunners for African sovereign bonds are keen to stress sovereign issuance in recent years has taken place in countries with relatively transparent and sustainable borrowing programmes, and subject to credit-rating agency oversight to assess the institutional capacity to absorb and allocate capital.

What’s more, Zambia's $750 million issuance in 2012, for example, was accompanied by reassurance the funds would be used to fund infrastructure projects, rather than for recurrent expenditure, meaning foreign markets, by and large, have not directly financed state largesse.

 Source: ODI