Reasons to be wary of African debt expansion

Nobody is quite clear how to look at the African expansion of capital markets. Does it present healthy investment opportunities or rather the early signs of a dangerous credit bubble?

The IMF review issued last week mentioned improved fiscal policies, but it warned that a few countries had “undertaken excessive fiscal expansions partly financed by foreign borowing thereby increasing their vulnerability to sudden cash flow reversals.” (Unfortunately, i could not find the one study mentioned in the article, but this one is also quite informative on the subject)

More and more rating agencies are being increasingly painful with their analysis of sub-Saharan African markets, increasing transparency and hopefully also being able to influence investors in finding those bond issues which are worth their funds. “International credit agencies downgraded the ratings of Ghana, Zambia, and, lately, Uganda, but the outlook for Rwanda was revised to positive, and Senegal was revised to stable. These developments increased borrowing costs for the governments of frontier economies, which contributed to the postponement of several sovereign bond issues totaling about US$4 billion originally planned for end-2013.” (Source: IMF. Regional Economic Outlook: Sub- Saharan Africa. April 2014)

It might not be the best idea to just stand and watch how Zambia is raising USD1bn in an international bond sale to primarily plug a budget deficit consequence of a credit downgrade. Rwanda used the bond proceeds to complete a convention center. How will these investments generate liquidity to pay back bondholders in 19 years? Since capital markets do not offer debt relief 🙂 and there are a lot of bonds to be issued.

Ergo, African debt markets are growing rapidly, but from a very small base and with little experience. What is the link with microfinance? Well, small developing economies are dynamic if the credit supply is given. When small microentrepreneurs have access to loans, the economy is growing rapidly. However, these small effects might not enable a country immediately to raise USD millions and billions on international capital markets.

Even though, in the final paragragh of the article, a representative of Renaissance Capital considers the African governments as behaving fairly reasonable and only some countries will take advantage of investors throwing money at them and borrowing too much, however, i find these developments worrysome and would not like to see African countries coming to donors’ doors in 15 years to ask for debt relief from money demanded by capital markets….

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