Special Report: Eurobonds, an opportunity or a curse for African economies ?


Written by: Daniel Koffi

Governments in African countries for years have been relying heavily on their exports and foreign aid to finance their activities, for the past few year a new instrument was added to the list tools they have in order to finance themselves, these instruments are Eurobonds.
And this form of financing appears to be causing worries to the CEO of Credit Suisse. Earlier this month Tidjane Thiam, the Ivory-Coast born CEO of credit Suisse, said that it was “madness” for African countries to rely on loans in foreign currencies to fund vital infrastructures such as roads, power, and clean water. For him, Lenders in Africa must instead find domestic savings to invest in local projects.
The past few years we have assisted in a surge in the amount of issuance of Eurobonds by African countries. In 2007, Seychelles was the first sub-Saharan African country besides South Africa to issue bonds. Ghana followed in 2007 by raising $750millions in Eurobonds, since 2006 the list have been completed by countries such as Zambia, Gabon, Senegal, Ivory Coast, the democratic Republic of Congo, Nigeria, and Namibia.

In total, more than 20% of the 48 sub-Saharan nations have issued Eurobonds according to the IMF.
African governments see it as a way of diversifying the source of financing and a manner of distancing themselves from the traditional foreign Aid.
Eurobonds gives them the possibility to reduce their budget deficit and raise money for development projects when domestic resources are lacking. Another reason is that issuing Eurobonds is less restrictive and it allows governments to have more control over the money they obtain, in opposition to the loans from the IMF and other Financial Institutions.

African Governments are not the only one enthusiastic about the issuance of Eurobonds, maybe one of the main factors in the surge of Eurobonds is the fact that global investors are eager to invest in emerging markets in general and in Africa specifically. These bonds are promising higher return than what they would have been able to receive in mature markets. According to Mthuli Ncube, Chief Economist at the African Development Bank (AfDB) it’s a sign of the Investors endorsement of Africa’s buoyant economic prospects. Indeed, while the developed world has been rocked by economic and financial crisis, Africa kept a steady growth rate, averaging about 5% per year. Eurobonds also give the opportunity to nations south of the Sahara to enter the global financial market, where the African States up to recently were only represented by South Africa, Tunisia, and Morocco.

Nevertheless, African Bonds are still regarded by some investors as risky assets. They are concerned about the vulnerability to commodities prices of African countries, the lack of political stability, the fiscal irresponsibility, the lack of sounds statistics and a history of defaulting. As an example Ivory Coast in 2011 because of a post-electoral crisis defaulted on a $2billion dollars bond.

While many African nations have raised hundreds of millions of dollars with the issuances of bonds, the current global economic condition can only raise concerns about the ability of African countries to repay their loans.
For the past few months, a price of commodities has been at their lowest level in years. The Chinese Economic slowdown contributed to a decrease in the demand of commodities as well.
African economies, such as Nigeria, Angola, Ghana, and Zambia, which, for the most part, are relying heavily on commodity export have been hit hard. As a result the currencies of those countries have been depreciating against the dollar (most of the bonds are issued in US dollars), which will make harder for them to pay back their loans, Ghana and Gabon are struggling to find the money for $750 million and a $1 billion, respectively, on 10-years bond maturing in 2017.

According to the British think thank, Overseas Development Institute (ODI), The exchange rate risk of sovereign bonds issued by governments in sub-Saharan Africa in 2013 and 2014 is threatening losses of $10.8 billion – a value equivalent 1.1% of the region’s Gross Domestic Product (GDP)
“ Warren Buffett joked when the tide goes down you see who has been swimming without trunks. Some of those economies will fall on their face because of that currency mismatch,” Tidjane Thiam said.
In Addition to that, we should expect the Federal Reserve raising its interest rates by the end of the year or early in 2016. Decreasing the interest for an investor in some of the African countries deemed vulnerable or too risky, which will lead to an outflow of capital from Africa to the US. In addition to that making it harder for countries to raise money on the market and especially to do so at a low or affordable interest rate. Contributing to a slowdown of the economic growth of these countries.

Although not all countries in Africa are presenting a high risk of default, for example, Ivory Coast, the world biggest cocoa producer present lower risks as its currency the CFA franc is pegged to the euro, protecting them from the exchange rate risks. And the country is also a net oil importer. Ivory Coast has been heavily invested in improving and building infrastructure, which will improve the country’s growth prospects.

So what can African countries can do in order to avoid being in the situation described by Warren Buffet?
The ability to Issue bonds on the global market is definitely a good sign for African economies. It has some important advantages but countries need to have sound development policies, they should not raise money just to finance public payroll like we saw in Ghana or for military spending. Instead, they should borrow to invest in infrastructure that will contribute to the development and sustainable growth of the nation. They should not have to borrow more capital in order to pay back a bond arrived at maturity. Nobel prize Economist Joseph Stiglitz expressed in a blog post that African countries need “comprehensive debt management structure”; they should carefully plan their investment and avoid borrowing in order to repay former debts.
African countries should also start mobilizing domestic savings in order to finance their investments.
That can be done by encouraging public savings, by strengthening actual common economic institutions, governments of the West African Economic and Monetary Union are more and more able to mobilize domestic savings and issue treasury bills and bonds. Other countries like Ghana, Ethiopia and India have found a way of using the diaspora’s saving by issuing diaspora bonds. Morocco as another example created a Caisse de Dépôts in order to develop their domestic capital market.
Amadou Sy a Deputy chief at the IMF in its article “Borrow First”, stated that “developing a well-functioning domestic bond market to attract domestic and foreign savings—especially over the long term—is not easy. To that end, conventional advice is that countries must improve macroeconomic policies; debt management; and the regulatory, legal, and market infrastructure—as well as develop an investor base. Money markets are the cornerstone of capital markets and a natural place to start reforms. Commercial banks are typically the largest investors, and a well-functioning interbank market is key. Ensuring the liquidity of domestic markets should also be a priority. ”

The period where African countries were able to raise “cheap” money on the market is I believe coming to an end with the current situation it is going to be harder to raise money and it will be more costly, hence the necessity for African countries to better mobilize the financial resources of the continent and develop carefully planned and managed borrowing and development policy.
At the end of the day Eurobonds are for African countries what Credit cards are for College students, most of us need money to develop, borrowing to finance our needs is a great advantage but doing so irresponsibly can have important consequences on our futures.
Written by
Daniel Koffi

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