FOREX Africa: Africa’s Debt Rising To Unsustainable Levels

March 5, 2015

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFK Insider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

Ghana gets a bailout

To the surprise of no one, as February came to a close the IMF extended Ghana a $1.0-billion bailout package aimed at stabilizing the Ghanaian economy and its collapsing currency, which since the beginning of last year has gone from 2.35 cedi to the dollar to about 3.51 to dollar today:  losing nearly half of its value.

Although the cedi has recovered from the low it reached in August when it hit 3.82 to the dollar, the trend since the start of the year has, like with most commodities, been trending downward.

The deal, as such things go, is rather typical.  It will be spread out over three years with the first $940-million disbursement due in April.  In exchange the government will be forced to increase fuel prices by hiking a tax on petroleum to as high as 17 percent and ending costly energy subsidies.

Also in the works is a freeze on hiring public sectors workers and, eventually, a “rationalization” of said workforce.

Altogether the IMF hopes to see Ghana cut its deficit from 9.5 percent of GDP today to 3.5 percent by 2017 – meaning if you are a nurse or teacher, it may be best to start polishing your resume now.

As for how well it will work. Well, just look at Greece today – and past history of the IMF’s structural adjustment programs – to see just how great private-sector growth will be after that.  Others, not just public sector workers, therefore have a lot to lose in the coming IMF program, even though the IMF says growth should hit 3.5% in 2015 and 5.0-6.0% by 2017.

Ivory Coast sells bonds

For Ghana the turn to the IMF after such a long economic boom is no doubt humiliating, and is a reminder of years past when the country was also forced by outsiders to make painful cuts and reforms.

What must rub salt in the wounds is, however, that this rescue package comes at a time when so much of Africa is both growing and testing the international bond market.

Indeed, a day prior to the announcement of Ghana’s rescue package its neighbor to the west, Ivory Coast, raised as much in a bond issue as Ghana was being bailed out.

The $1.0-billion debt issue by Ivory Coast is, like the recent one for Ethiopia, being seen as a measure of investor appetite for African debt.

If the terms received by the country are any indicator then they are still hungry as Ivory Coast was able to get the funds at a yield of 6.625 percent— below that received by Nigeria and Zambia but above Rwanda and Kenya.

Notably, this comes after Ivory Coast attracted orders of $4.75 billion on a $750-million, 10-year bond last year: some three years after political instability followed by French military intervention forced a suspension of payments on a $2.3-billion note in 2011.

Africa Rising to Africa Watching

Although the Ivory Coast’s debt issue can be seen as a success, there are broader indications that investor sentiment might be dimming, at least for the time being, on Africa.

Bloomberg recently reported that sales of African sovereign debt are likely to fall from last year’s record $16 billion as trouble in the commodity sector—which may be headed into a decline after nearly a decade-and-a-half  boom – and a stronger dollar put pressure on these economies.

This means financiers are now much more concerned about the ability of individual countries to actually service the debts that they’ve already taken on.

As one African economic analyst quoted by Bloomberg put it, bankers are now starting to get worried about the ability of some to make interest payments, let alone pay off the principal.

To put it in perspective, the UK’s Overseas Development Institute recently reported that the exchange-rate risk of sub-Saharan African sovereign bonds points to potential losses of nearly $11 billion.

Meanwhile, the yield on Nigeria’s $500-million Eurobond due in July of 2023 has jumped 199 basis points since last May.

All this suggests that bullish sentiment on Africa may need to be reassessed, at least as it pertains to the present and near term: something the IMF itself implied last year.

Then IMF chief Christine Lagarde warned in an interview that some countries, “have got ahead of themselves” in terms of taking on both debt and ambitious levels of government spending.

This will naturally have consequences, especially if all this spending and growth from the previous fat years of the Chinese-driven commodity boom doesn’t trickle down to average people.

Africa Waiting… but for how long?

If so, that could have political consequences, some of which is already being felt. It’s a cliché, but the old truism about Africa that in many countries there are more private planes at airports than books in classrooms nonetheless remains a hard fact.

Job creation among the young has not been particularly strong and unless that changes quickly then the predicted boom as Africa’s working-age population surpasses that of China and India by 2040 will wither and die before it ever gets started.

Where does that lead?

One has to only look at northern Nigeria and South Africa today to see where that route lies:  political paralysis followed by the distinct possibility of instability as Africa’s politically-connected rich get richer while the rest take to the streets or pick up arms to show their country’s respective one percenters just what happens when inequality and economic stagnation roll on year after year.  As they say, watch this space.

Source: AFK Insider

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