Sub-Saharan Africa: A case for the defence
Fears that African states have over-indulged in sovereign issuance are exaggerated.
Sub-Saharan Africa sovereigns, with mostly weak debt histories, have thrown caution to the wind in recent years, joining the ranks of international issuers, driven by a bid to access long-term dollar financing for infrastructure investments, to diversify sovereign borrowing sources and to establish benchmarks for corporates at a time of low rates.
According to Dealogic, 2013 was a record year for sub-Saharan African (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, according to the Overseas Development Institute, is roughly equivalent to 20% of aid to the continent and 12% of foreign direct investment inflows.
Given Africa’s tortuous debt history, the fast pace of issuance has sparked a backlash, with warnings over the moral hazard in financing governments that are prone to corruption and economic mismanagement. Fears over debt-service capacity weigh on market sentiment too. Some investors and analysts even argue that issuance is a means of side-stepping the scrutiny and conditionality of multilateral lenders.
These fears are over-blown. Sovereign issuance in recent years has taken place in countries with relatively transparent and sustainable borrowing programmes, and have been subject to rating-agency oversight. What’s more, the debt-to-GDP ratio for the region has risen only moderately, from 29% in 2008 to 34% in 2013.
Meanwhile, the Russia-Ukraine conflict has not triggered a wave of political-risk repricing, confirming investors’ ability to differentiate credits and have faith in domestic-growth drivers in African economies.
Africa’s problem is not too much capital-market access for public-sector issuers but too little long-term funding in dollars for the private sector. Sovereign issuance typically helps to establish price benchmarks for corporates and to market the country’s economic model to foreign investors.
The scrutiny of public accounts through credit-rating agencies and foreign-investor discrimination might help to reduce governments’ rent-seeking behaviour, while investing in infrastructure should nurture private-sector growth and, in theory, reduce the role of the state as a provider of marketable goods and services.
There is a big risk of market over-exuberance in the coming years, however. Anyone banking on an efficient market, with a sensible supply and pricing of African sovereign bonds, in the years ahead may get a rude shock.