Should African countries that were granted debt relief by the G8 group of nations just a year ago be able to access the international debt markets?
With several sovereigns actively planning new international issuance as early as the end of this year, the question is becoming increasingly relevant.
Whether or not international issuance is permissible under the conditions attached to the debt forgiveness programme is of only secondary importance here, though. Bankers and investors are pragmatists. They also frequently have helpfully short memories. Few of them will care if governments do decide to issue hard-currency bonds as long as they can pick up a decent yield and achieve better diversification.
The core issue is more one of whether it makes sense for governments to focus on this strategy at the expense of developing their domestic capital markets. There is some talk that smaller sovereigns, which do not need to raise more than one or two hundred million dollars of capital each, should band together and issue debt jointly in international markets, perhaps under the auspices of an agency such as the African Development Bank.
But such volumes could be more than adequately absorbed by each country’s domestic investor base. Moreover, countries that did decide to look to their home markets would no longer forfeit the interest of international investors by doing so. Specialist emerging markets funds in particular are increasingly happy to buy local-currency African paper.
This is part of the wider trend among emerging markets issuers and investors to prefer paper denominated in local currencies to hard-currency issuance.
Some African economies already have flourishing domestic bond markets and it is purely a question of investors opening their eyes to existing opportunities. In other countries, where the debt markets are in their infancy and there are restrictions that preclude international investors from buying local debt, lifting these restrictions in a measured manner should be a priority.
This would enable them to borrow without some of the risks that foreign currency debt entails, such as exchange rate risk, as well as bringing them in line with the wider market trend. Both of these effects would be beneficial for countries that need to show that they are taking advantage of debt forgiveness.
