The International Monetary Fund (IMF) has warned African nations issuing billions of dollars in sovereign bonds that they could overload their economies with too much debt and derail the best economic period for the region in a generation.
The warning comes as the continent enjoys a virtuous circle of strong economic growth and improved governance that many have enthusiastically called “Africa rising”. The improved conditions are in sharp contrast with the lacklustre decades of the 1980s and 1990s, when poverty levels climbed across the region.
Christine Lagarde, IMF managing director, told African finance ministers at a meeting in Mozambique that growth in the region had “clearly” took off, allowing more than a dozen countries to tap the sovereign debt market for the first time in their history.
But in an interview with the Financial Times, she warned about the risk of “spoiling” the Africa rising narrative. “Governments should be attentive and they should be cautious about not overloading the countries with too much debt,” she said.
Sovereign bond issuance from countries such as Gabon and Rwanda helped African countries to raise record $11bn in 2013, up from $6bn a year earlier. In 2000, African states raised a paltry $1bn from capital markets.
“That is additional financing, but that is an additional vulnerability,” Ms Lagarde said.
Sub-Saharan African countries have benefited over the past five years from investors’ hunger for yield owing to ultra-loose monetary policies in the US, Japan and Europe. The borrowing spree has lifted public debt, which the IMF said will hit a ten-year high of 35 per cent of the GDP in 2014. Such debt levels are nonetheless much lower than in Europe and some Asian nations.
Ms Lagarde warned that investors have started to demand higher interest rates for holding the debt of some African countries, a sign the market has become increasingly wary of rising fiscal deficits.
When Zambia returned to the sovereign bond market earlier this year, it had to pay a yield of 8.625 per cent for a 10-year $1bn note, up from 5.63 per cent on its bond market debut in 2012.
The IMF forecasts that fiscal deficits in sub-Saharan Africa will hit 3.3 per cent of the gross domestic product in 2014, a large swing from a surplus of 2.5 per cent in 2004.
In spite of these risks, the IMF has painted a relatively rosy short-term outlook for the region, In its twice yearly review, published last month, the IMF said that economic growth will accelerate this year to 5.4 per cent, up from 4.9 per cent in 2013.
“We are seeing a momentous transformation in Africa,” Ms Lagarde said. “We have seen significant growth, a reduction some of the poverty [and] improved literacy.”
But after more than a decade of strong economic growth, the IMF is sounding somewhat more cautious, warning about lower commodities prices and mounting problems at home. “You have the Africa rising potential, you have the natural resources, you have the keen interest of foreign investors . . . but watch out. Africa rising; do not spoil it,” Ms Lagarde added.
Foreign investors nonetheless seem keen to pour money into the continent, with the African Development Bank this month forecasting portfolio flows and foreign direct investment in 2014 at a record of more than $80bn.
Source: FT/OTCEER