Africa debt, commodities and multilateral institutions: a synopsis

Dear Readers:

                         Ivory Coast is now the number one darling of investors interested in the continent of Africa.  The country is dependent on soft commodities for majority of its revenue with cocoa leading the way.  The country issued a $1B Eurobond in February 2015 at 6.625 per cent and in July 2014 issued a 10-year $750m Eurobond at 5.625%.  Seven months later debt investors bought more debt at a yield 100 basis points higher with a staggered repayment in 2026, 2027 and 2028.  

Kenya, the number two darling of investors and multilateral institutions issued two Eurobonds in 2014 totaling $2.75B and is preparing to issue another one sometime in the second half of 2016.  Kenya is also soft commodity dependent like Ivory Coast with the country being a major exporter of tea and tobacco.  Both countries are also net crude oil importers which is looked at favorably by investors given the crude oil price decline over the past twelve months. Kenya's 2014 Eurobond was two-thirds subscribed by American investors and one-quarter by British investors. This is a country that has a debt to GDP ratio in excess of 50%.

Debt/GDP ratio keeps getting bandied around by economists and debt capital market people as the figure of reference.  How about annual debt service/revenue?  African countries are borrowing all of a sudden and at a fast pace.  I call it a debt binge.  Debt/GDP does not tell enough of the full story. The problem with Ghana, Angola, Zambia, Nigeria, Mozambique (to name a few) is too much of their annual revenue is going to debt servicing.  African countries may have just tasted the forbidden fruit.  It taste and looks really good at first (Ethiopia is coming again less than eighteen months after its first issue and Kenya is coming for its third issue in less than two years) and then leaves a bitter aftertaste that does not go away even after brushing.

The number of African countries (the whole continent and not SSA) that have Sovereign Wealth Funds (SWF) is TEN.  The number of African countries that have issued at least one Eurobond is SIXTEEN.  The two largest SWF are Libya and Algeria.       

The IMF (gave Morocco a precautionary liquidity line) and the World Bank provide sweeteners to help African countries take on more debt directly from them or through Eurobonds.  When commodity prices start tumbling they advise leaders that African currencies should be devalued to mitigate the negative effects of tumbling commodity prices (as is the current pressure on Nigeria) and this alone is a major precursor to debt default and the vicious cycle continues with the multilateral institutions coming back to help resolve what they played some part in causing.  African leaders take the brunt of the blame for being irrationally exuberant when a new commodity is discovered or prices go on a temporal bullish run.  Saving is laughed at while spending (mostly recurrent) is celebrated.    

Ghana was the darling of the world after discovery of oil in 2007; the same year the country issued its first Eurobond for 10 years and raised $750m.  In 2013, Ghana issued a 10-year $750m Eurobond at 8% as the oil discovery euphoria gathered momentum.  This was pretty expensive and Ghana and its people are paying the price while still on the hook to investors (mostly foreign) for the dollar principal and interest payments.  

Debt investors gobbled it up.  As the casual chatter goes "if you put up high rates, we will come." Ghana came again in 2014 with a $1B Eurobond and came again in the fourth quarter of 2015 for another $1B Eurobond at a yield of 10.75% in addition to a $400m guarantee from the World Bank. In 2 years Ghana has borrowed $2.75B with progressive increases in yield.  In 2014, the IMF president said that "the story of Africa rising could be at risk."  The IMF warned African countries about the dangers of growing international sovereign debt markets.   

Ghana reached out to the IMF for succor in 2015 and the organization came to its aid.  IMF debt as many African countries are aware of comes with covenants that typical bring austerity to the already difficult economic situations of these commodity dependent African countries.  The rudder of Ghana's ship is no longer being controlled by it despite having gained independence 60 years ago in 1956.  Ghana's obligations to foreign investors has left it dependent despite being an independent nation.  Ghana fell neck-deep into the pit dug for it.  A vicious cycle may very well have set in.       

Angola (second-largest crude oil exporter in Africa) issued its first Eurobond in November 2015 despite it being in the mist of an economic crisis given the slump in crude oil prices.  Investors ignored the risks and fully subscribed to the $1.5B Eurobond.  The Angola bond is now seen as one of the world's most likely sovereign debt default risks while still being indebted to its Eurobond investors.  Less than six months later Angola has gone cap in hand to the IMF seeking financial help. Zambia (copper dependent) is likely next on the queue.  

The only African country that was not colonized is the only African country that has refused to open its banking system to foreign investors.  The same country has the highest GDP growth rate across Africa and has the highest spending on infrastructure as a percentage of GDP and envisions an energy surplus.  This country is Ethiopia.  Ethiopia has issued a $1B Eurobond in 2014 at 6.625% and is likely coming for a bigger slice of the pie in 2016.  

This is running the line of not being a synopsis.  I am having fun, but need to close out nonetheless.

Slave trade would not have happened if Africans did not fully cooperate with the explorers to the continent.  African leaders are now fully cooperating with the international debt capital markets and shackling their countries' financial futures.  The bulge bracket investment banks keep smiling to the bank with the tacit support of the multilateral financial institutions.   

Any African country that issues a THIRD Eurobond without the first one having matured or been fully paid off in advance of maturity will not be bringing freedom to its economy and people. Africans have been physically chained in the past; African leaders should not allow history painfully repeat itself by shackling the economic future of its people through debt.  There is a reason its called debt BURDEN.  Freedom without being free is an illusion.   The power to succeed lies within. 

Sovereign debt issuance is supposed to be about sacrificing today for a better tomorrow.  Thus far, in hindsight (combination of factors) it has been a case of sacrificing today for a more challenging  tomorrow.  Debt burden is an act of  bondage and not financial freedom.  Africa is too rich in natural resources to be poor.  It is never too late to turn the tide.  First things first; African countries should end the vicious cycle of paying down and/or refinancing debt just to take on more debt and remain in penury with perennially low GDP per capita.  

How well can a country focus on its more pressing internal issues (number one priority of any country) when it remains continually distracted by its creditors who are more interested in their internal rate of return (number one priority of any investor company?)      

P.S. I attended an Africa Rising event in New York in February.  I asked a question about investors wanting African countries to make economic decisions that favor their businesses but negatively impact African economies over the long-term (e.g. devaluation.)  Only one panelist admitted the dilemma while others pleaded the fifth.  I was commended by my fellow attendees for the quality of my question while the panelists were not pleased with my question (based on body language.)  

Chasing money first (deals, transactions etc) will always be acceptable and welcome.  Doing the right thing in business typically clashes with the profit drive and is therefore not welcome.  What is acceptable in business is often not right and what is right is often not acceptable in business.  What a conundrum!    

 Dialectic Africa Analyst