Macky Sall had a bone to pick with creditors. Sitting before the head of the International Monetary Fund, investors and diplomats during a conference on African debt in December, the Senegalese president complained that Western prejudice keeps borrowing costs unfairly high on his continent.
“This negative-risk perception is not in tune with the reality of our continent,” Sall told the gathering that included the IMF’s Kristalina Georgieva. “People think that this is a problematic continent and demand a rate of return that is unparalleled elsewhere in the world.”
Sall, 58, was lashing out from inside a high-ceilinged, post-modern conference center that overlooks a satellite city being built on the outskirts of Dakar. The new city, which will house ministries, universities, residential buildings and a sprawling industrial park, together with the six-lane toll highway connecting it to a gleaming new airport were all financed with debt.
Like other African governments, the former French colony has rushed to sell sovereign bonds to fuel an era of unprecedented growth that helped lift millions out of poverty over the past decade. Eurobonds have displaced multilateral lenders like the IMF as Africa’s main source of financing, going from one nation offering $200 million in 2006 to about two dozen selling $117 billion of such paper.
Foreign investors, hungry for returns in a world awash in cheap money, have snapped up African debt. But that hasn’t lowered African nations’ borrowing costs, which for 10 years are between 5% and 10% — well above other emerging markets.
To some, the “Africa premium” stems from racial prejudice and lazy analysis that taints all countries on the continent with the same brush — one of political instability, corruption and financial mismanagement.
“Some investors really think that Africa is the jungle and there is a lot of chaos; that is the underlying perspective with which they establish their own required return,” said Misheck Mutize, who leads an African Union project to help governments improve their credit ratings.
Consider Senegal, for example. It is one of continent’s most stable democracies, praised by the IMF for its economic management and poised to become a major oil exporter after discovering crude and natural gas off its shores. Yet it pays over five times more on its 10-year notes than Greece, the epicenter of Europe’s debt crisis in 2008, which has a lower credit rating. With average annual growth of over 6% for the past five years, Senegal also pays nearly three percentage points more than similarly-rated Serbia, whose economy expanded at half the pace over the period.
Then there is Ghana, whose borrowings are more expensive than those of Belarus, rocked by protests against its autocratic leader since August. The Eastern European nation, which issued notes in June, pays one percentage point less than similarly-rated Ghana, a stable democracy that until recently was one of the world’s fastest-growing economies.
Black lives matter
The premium demanded by investors is increasingly driving the region’s better-managed countries like Senegal and the Ivory Coast to cry foul. It’s a sentiment that’s getting more traction amid the Black Lives Matter protests after the killing in the US of George Floyd, a black man, by a Minneapolis police officer.
“Black Lives Matter raises a broader question about the history of systemic racism and maltreatment of people of color in the world,” said Howard Stein, a professor at the University of Michigan. “Has this spilled over into the perception of Africa in these markets? It’s a possibility.”
He and Michael Olabisi, a Michigan State University professor, found that sovereigns in Sub-Saharan Africa paid a premium of 2.9 percentage points over the rest of the world, or an extra $2.2 billion between 2006 and 2014. Recent data shows the penalty could be vastly larger, said Olabisi, who’s updating the 2015 study.
Higher rates mean that many African countries are spending more to service their external debt than on health-care. Angola spends seven times more, for Cameroon its six times and for Ghana nearly four times, according to the Jubilee Debt Campaign, a London group that advocates relief for poor countries.
Several elements keep African borrowing costs high. Inexperience in debt markets has hurt the reputation of some sovereigns, AU’s Mutize said. In August 2016, the Republic of Congo missed a bond payment due to an administrative error, only to pay the coupon a month later in what is arguably one of the briefest defaults in history.
In some cases, the high rates are a credible reflection of risk. Zambia, which called on its creditors to reschedule payments, pays a yield of nearly 40% on a 10-year note due in 2022 — the most on the continent.
Inconsistent data on finances and reserves in many of these countries makes analysis difficult, said Jan Friederich, head of Middle East and Africa sovereign ratings with Fitch Ratings. Low tax collection and high reliance on raw materials also makes the region vulnerable, but weak governance hurts ratings the most, he said.
“Governance, politics and to some extent corruption certainly figure quite high in the list of concerns of investors considering African Eurobonds,” he said.
Although not unique to Africa, political meddling in economic management has also led to unnecessary borrowing, undermining confidence in the continent’s capacity to manage its finances, said Kingsley Moghalu, the Nigerian central bank deputy governor between 2009 and 2014.
“Excessive borrowing is driven by political dynamics with politicians looking for the quickest way to spend before their term ends,” said Moghalu, who now runs an investment advisory firm in Washington.
Such financial mismanagement has unfortunately hurt other countries on the continent that run their economies responsibly, said Vera Songwe, the head of the United Nations Economic Commission for Africa.
“There is still a sense among some investors that an earthquake in Mozambique washes away Senegal,” she said.
The African bond market is dominated by a small group of investors, which raises the premium because there isn’t a liquid secondary market, Songwe said. To bolster competition and lower rates, she proposed a fund backed by central banks from the Group of 20 leading economies to help governments sell higher-rated bonds.
But some efforts to help African economies may be doing more harm than good. A G20 initiative during the coronavirus outbreak to delay debt service payments from poor countries until next year have kept African yields high, said Kevin Daly, investment director at Aberdeen Standard Investments.
“The initiative was a factor in solidifying this perception that Africa is a riskier borrower compared to its peers elsewhere,” said Daly, who manages two dedicated Frontier bond funds and is involved in talks with African officials about the suspension initiative.
After shooting up to 20% in April on pandemic fears, the average yield of Latin American sovereigns fell in a matter of weeks to less than 7%. In contrast, yields in Sub-Saharan Africa — excluding South Africa — have yet to drop to pre-pandemic levels and hover near 8%.
The region’s rapid build up of external debt — which doubled to $365 billion in the decade to 2018 — hasn’t helped.
Still, the continent’s good track record in repaying its Eurobonds doesn’t justify the wide yields spread against countries like Italy and Greece, which are still struggling to grow in the wake of a debt crisis, said Hippolyte Fofack, chief economist for the African Export-Import Bank.
With the exception of countries like Mozambique and Seychelles, most African sovereigns have remained current on their bond payments since a continent-wide debt write-off backed by the IMF in the mid-2000s.
“There is this tendency to think that the risk attached to African entities must be very high while in fact very few African countries have defaulted,” Fofack said. “How can the spread gap with Italy be over 800 basis points? It’s not justified.