Africa’s newfound love with creditors: Bond bubble in the making?

I know it is increasingly becoming not kosher to put a damper on the Africa Rising narrative (these guys missed the memo, H/T Vanessa) but here is a much needed caution from Joe Stiglitz and Hamid Rashid, over at Project Syndicate, on SSA’s emerging appetite for private market debt (Africa needs US $90b for infrastructure; it can only raise $60 through taxes, FDI and concessional loans):

To the extent that this new lending is based on Africa’s strengthening economic fundamentals, the recent spate of sovereign-bond issues is a welcome sign. But here, as elsewhere, the record of private-sector credit assessments should leave one wary. So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world’s next debt crisis?

…….Evidence of either irrational exuberance or market expectations of a bailout is already mounting. How else can one explain Zambia’s ability to lock in a rate that was lower than the yield on a Spanish bond issue, even though Spain’s [which is not Uganda...] credit rating is four grades higher? Indeed, except for Namibia, all of these Sub-Saharan sovereign-bond issuers have “speculative” credit ratings, putting their issues in the “junk bond” category and signaling significant default risk.

The risks are real, especially when you consider the exposure to global commodity prices among the ten African countries that have floated bonds so far – Ghana, Gabon, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania.

In order to justify the exposure to the relatively higher risk and lending rates on the bond market (average debt period 11.2 years at 6.2% compared to 28.7 years at 1.6% for concessional loans) African governments must ensure prudent investment in sectors that will yield the biggest bang for the buck. And that also means having elaborate plans for specific projects with adequate consideration of the risks involved.

Here in Zambia (which is heavily dependent on Copper prices), the Finance Minister recently had to come out to defend how the country is using the $750 million it raised last year on the bond market (2013-14 budget here). Apparently there was no comprehensive plan for the cash so some of the money is still in the bank awaiting allocation to projects (It better be earning net positive real interest).

“They are fighting each other. By the time they have projects to finance, they will have earned quite a lot of interest from the Eurobond money they deposited. So, all the money is being used properly,” he [Finance Minister] said.

Following the initial success the country’s public sector plans to absorb another $4.5b in debt that will raise debt/GDP ratio from current ~25% to 30%. One hopes that there will be better (prior) planning this time round.

Indeed, last month FT had a story on growing fears over an Emerging (and Frontier) Markets bond bubble which had the following opening paragraph:

As far as financial follies go, tulip mania takes some beating. But future economic historians may look back at the time when investors financed a convention centre in Rwanda as the moment that the rush into emerging market bonds became frothy.

The piece also highlights the fact that the new rush to lend to African governments is not entirely driven by fundamentals – It is also a result of excess liquidity occasioned by ongoing quantitative easing in the wake of the Great Recession.

I remain optimistic about the incentive system that private borrowing will create for African governments (profit motive of creditors demands for sound macro management) and the potential for this to result in a nice virtuous cycle (if there is one thing I learned in Prof. Shiller’s class, it is the power of positive feedback in the markets).

But I also hope that when the big three “global” central banks start mopping up the cash they have been throwing around we won’t have a repeat of the 1980s, or worse, a cross between the 1980s (largely sovereign defaults) and the 1990s (largely private sector defaults) if the African private sector manages to get in on the action.

African governments, please proceed with caution.

Museveni: UN missions stifling state capacity development in Africa

The Daily Nation reports:

Ugandan President Yoweri Museveni has said UN peacekeeping missions [especially in the DRC] are derailing efforts by African governments to end conflicts.

He criticised the UN system of peacekeeping saying: “External support by the UN makes governments lazy and they don’ t focus on internal reconciliation.”

“The mistake is internal actors with no correct vision and the UN which does not focus on internal capacity building but instead focusing on peace keeping all the time. Without the internal solutions, you can’t have peace, ” Mr Museveni said in a statement on Thursday.

Some Congolese and experts on the DRC may disagree with Museveni’s analysis but it has some truth to it. As I pointed out in an African Arguments post several months ago, there is no short cut to fixing the Congo. State capacity development must be THE overriding concern (for more on this see here and here).

Also, The International Crisis Group has a nice piece on the recent takeover of the mining town of Lubumbashi by Mai-Mai fighters. The writer notes:

Since President Joseph Kabila’s controversial election victory in November 2011, government control over DRC territory has been in drastic decline. Beyond the fall of Goma to the M23 rebellion, Kinshasa has failed to repel the activities of various other armed groups: the Mai-Mai Morgan in Province Orientale, the Ituri Resistance Patriotic Front (FRPI) and the Mai-Mai Yakutumba in South Kivu, Rayia Mutomboki in North and South Kivu, as well as the Mai-Mai Gédéon in Katanga. (On the eastern Congo armed groups, see the October 2012 briefing Eastern Congo: Why Stabilisation Failed. On the Katanga armed groups, see the report Katanga: The Congo’s Forgotten Crisis.)

Is this the beginning of the Third Congo War?

Yesterday Goma fell to the M23, a rebel group in eastern DRC with alleged links to both Rwanda and Uganda. The fall of Goma increases the likelihood of an all out war in eastern Congo that might quickly degenerate into a regional war – just like the Second Congo War was (for more on why peace failed see this ICG report).

I am on record as lacking any sympathies for the Kinshasa regime under Joseph Kabila (see here, here, and here). The horrendous situation in eastern DRC is as much his fault as it is of the alleged meddlers from Kampala and Kigali. The fact that the international community has taken to viewing the conflict as primarily regional is a mistake as it masks Kabila’s own failings in improving governance in the eastern DRC . It also gives him a chance to continue free riding on MONUSCO’s presence in the region.

Sadly, the international community appears set to waste this latest crisis by issuing statements and imposing sanctions which will only tackle the symptoms rather than the real problems behind the conflict. As the ICG argues:

If international donors and African mediators persist in managing the crisis rather than solving it, it will be impossible to avoid such repetitive cycles of rebellions in the Kivus and the risk of large-scale violence will remain. Instead, to finally resolve this conflict, it is essential that Rwanda ends its involvement in Congolese affairs and that the reconstruction plan and the political agreements signed in the Kivus are properly implemented.
For these things to happen Western donors should maintain aid suspension against Rwanda until the release of the next report of the UN group of experts, in addition to issuing a clear warning to the Congolese authorities that they will not provide funding for stabilisation and institutional support until the government improves political dialogue and governance in both the administration and in the army in the east, as recommended by Crisis Group on several previous occasions.
Over at Congo Siasa, the DRC expert Jason Stearns offers some preliminary thoughts on M23′s endgame:
In the past, I have speculated that it will be difficult for the M23 to conquer and hold territory, mostly due to their lack of manpower, which started off at around 400-700 and is probably around 1,500-2,500 now. They have been able to rely on Rwandan (and, to a lesser degree, Ugandan) firepower for operations close to the border (in particular Bunagana and Rutshuru, allegedly also this recent offensive), the farther into the interior they get, they harder it will be to mask outside involvement.
Alliances with other groups­­––Sheka, Raia Mutomboki, FDC, etc.––have acted as force multipliers, but have been very fickle, as the surrender of Col Albert Kahasha last week proved. From this perspective, the M23 strategy could well be more to nettle the government, underscore its ineptitude, and hope that it will collapse from within.
However, the recent offensive on Goma has made me consider another, bolder alternative. If the rebels take Goma, thereby humiliating the UN and the Congolese army, they will present the international community with a fait accompli. Yes, it will shine a sharp light on Rwandan involvement, but Kigali has been undeterred by donor pressure thus far, and has been emboldened by its seat on the Security Council. Also, as the looting by the Congolese army and their distribution of weapons to youths in Goma has shown, the battle for Goma is as much of a PR disaster for Kinshasa as for Kigali.

from the annals of history

One insurgent movement within the country lingers from the 1964-65 wave of rebellions. Localized in the Fizi-Baraka area by Lake Tanganyika, this group – known in recent years as the Parti de la Revolution (PRP) – achieved notoriety in 1975 by kidnapping four Stanford students from a zoological research station in Tanzania. Its composition is ethnically restricted to Bembe, though its leader, Laurent Kabila, is a Shaba Luba. The movement now has only a few hundred followers, and has no possibility of enlarging its base of operations.

That was Crawford Young writing in Foreign Affairs in 1978.

In 1997 Laurent Kabila, backed by Rwanda, Burundi, and Uganda, was in charge of a much stronger force and marched from the east of the DRC (then Zaire) into Kinshasa. After the overthrow of Mobutu Laurent Kabila was sworn in as president, only to be assassinated in 2002 and succeeded by his adopted son, Joseph Kabila. The younger Kabila continues to face a simmering insurgency in the east of the country.

Karl Marx once noted that history repeats itself, the first time as tragedy, the second time as farce. President Kabila’s continued ineptitude may be watering the seeds of his own ouster by rebels from the east in a farcical repeat of history.

remembering lumumba

Hochschild, author of King Leopold’s Ghost, has an editorial in the Times in honor of Patrice Lumumba, the firebrand Congolese independence leader who was assassinated 50 years ago. His death, amid the chaos of the Katanga secession, marked the beginning of the hellish catastrophe that was the land of Mobutu Sese Seko, and latterly the Kabilas.

Throughout Africa, Lumumba remains a celebrated hero. The many Lumumbas across Eastern Africa are a testament to this fact.

Whether the same would be true had he actually lived to run the vast Central African state is another question altogether. As noted by Adam Hochschild in his piece:

“Patrice Lumumba had only a few short months in office and we have no way of knowing what would have happened had he lived. Would he have stuck to his ideals or, like too many African independence leaders, abandoned them for the temptations of wealth and power? In any event, leading his nation to the full economic autonomy he dreamed of would have been an almost impossible task. The Western governments and corporations arrayed against him were too powerful, and the resources in his control too weak: at independence his new country had fewer than three dozen university graduates among a black population of more than 15 million, and only three of some 5,000 senior positions in the civil service were filled by Congolese.”