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.)

Governing on the cheap in Africa

What is striking and surprising here is just how easy it can be to take over some African states, or large parts of them.  The post-independence historical record provides numerous examples where dozens or a few hundred armed men have done it.  This is generally just assumed to be the way things are in Africa, but when you think about it it is actually really puzzling.  Being the president in African countries (and many others besides) can be an incredibly lucrative deal.  Why don’t these rulers, in their own self-interest, take some of that money and use it to build crack units, presidential guards, or strong and loyal army divisions that would protect their hold on power against two dozen putchists, or a hundred or a couple thousand rebels armed with rifles and maybe some mortars?

I don’t think we have really good explanations for this in the relevant Pol Sci literatures.  Maybe the most promising hypothesis is that African presidents are so afraid of coups and attacks from inside their regime that they don’t want to support the construction of any organization that would be competent at using force.  Keeping the military weak  may lower their coup risk somewhat, but effectively trades coup risk off against higher risks of rural rebellion, insurgency, and foreign depredations such as we are seeing in Eastern Congo.

That is Jim Fearon writing over at Monkey Cage. More on this here.

Jim’s concern extends beyond security matters. Much of Africa remains under-governed in other regards as well – tax collection, garbage collection, provision of public goods like water and sanitation, roads, etc etc.

One key driver of this phenomenon, I believe, is the manner in which sectional elites (and those that they purportedly represent) are incorporated into the national system.

You see, many African national governments tend to have a president surrounded by a coalition of ethnic/sectional elites representing specific geographic regions or communities. This sort of incorporation of elites and the regions/social groups that they represent allows African central governments to govern on the cheap since as long as ethnic chief from region X can bring his people and sort of make them feel represented in the centre then the government has no reason to establish a strong presence in the chief’s homeland region (unless that region is economically viable).

A keen observer may ask why co-ethnics of these “ethnic chiefs” never demand for more from their supposed representatives at the centre.

The answer lies in the nature of citizenship in most of Africa. In many countries citizenship (and the associated claims on the state) tends to be mediated through one’s ethnic group. Talk of “our people” is common across much of the region. Even educated people have internalized the fact that you can only get jobs if a co-ethnic is in a high position in government. Everyone therefore invests in having a powerful ethnic representative at the centre that can effectively bargain with whoever is president (or in the core of the governing coalition) to get enough jobs for the boys and girls from back home.

But having such a person obviates the need for the central government to establish its presence at the local level since it is much cheaper to give the ethnic chief his own fiefdom in the name of a cabinet ministry. Barriers to entry allow for very long tenures for these ethnic chiefs thus breeding incompetence of the worst possible kind – like the case of Kenyan police officers accepting bribes from al-Shabab operatives to allow for passage of explosives destined for Nairobi.

From the president’s/government’s perspective, all you have to do to prevent an all out rebellion is be on good terms with enough of these ethnic chiefs or make it beneficial for them to live under your rule.

Seen this way, under-government is not just for the sake of coup-proofing but also an unintended consequence of the manner in which the masses and their representative elites are incorporated into the national government/state.

The best book out there that I have read on this subject is Catherine Boone’s Political Topographies of the African State. Boone is best read with Jeffrey Herbst’s States and Power in Africa, although Herbst’s conclusions are too deterministic for my liking.

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.

Waiting for Kabila to be Charlemagne

Joseph Kabila was sworn in today as President of the DRC following disputed elections last month. The main opposition has vowed to not recognize him as the legitimate president and are planning street protests. Some analysts believe that there will be blood in the streets of Kinshasa and other major urban centers.

If you think for a moment about the size and diversity of the DRC it becomes clear how hard it will be for the incorrigibly inept enormously challenged Joseph Kabila to be the one to drag the DRC out of its 50 year tailspin.

 

Democratic Republic of Congo

The truth be told, Mr. Kabila would not do any better running a village mboga kiosk. He is not an autocrat in the mold of Kagame, Zenawi, Museveni or even Sankara. He is closer to Samuel Doe, Bokasa and Valentine Strasser, ineffectual at best and outright disastrous at worst.

 

$500 million, and for what?

Congolese go to the polls on Monday, the 28th of November. The result of the election is almost a foregone conclusion. Incumbent president Joseph Kabila looks set to win another term in office – another 5 years to continue the mismanagement of the DRC’s resources through shady mining deals.

According to the Economist:

Whatever the result, doubts about the election’s fairness will persist, not least because of a perception that the electoral commission’s head is a friend of the president. Logistical problems are also ubiquitous, despite an election budget of $500m or so. As well as 11 presidential candidates, 18,000 hopefuls, including several pop stars and a rebel leader accused of ordering the rape of more than 300 women in eastern Congo last year, are contesting 500 seats in parliament. Some of the ballots will exceed 50 pages, which will surely daunt even the minority of voters who can read.

(Read the whole piece here)

If I were in charge of the promotion of democracy in the DRC I would push for a system of staggered elections, both nationally and at the provincial level. I would also try and broker a deal to create a government of national unity in Kinshasa (representing the provinces) and competitive elections at the provincial level. In my view, the longer that everyone keeps pretending that the Congo – with its 70m+ and landmass the size of Western Europe – can be run by a single central government in Kinshasa – the longer it will take to put the country on the path of institutional development that will be conducive to long run economic growth.

Centralized state development definitely makes sense for smaller African states (think of the infamous trio of the Mano River basin). But if you are the DRC, capacity development in the capital must necessarily be accompanied by the strengthening of institutions at the provincial level – with more emphasis, in my view, on the latter than the former.

The number one problem facing the DRC right now is woeful state incapacity. It is doubtful that elections alone will force politicians’ hand in the right direction.

For more on the elections follow Congo Siasa.

Mining and Voting in the Congo

Elections in the DRC have come to be marked by a fire sale of state assets. A recent report by the UK parliament estimates that the government may have lost up to $5.5 b due to undervaluation of these state assets before sale.

No prizes for guessing where part of the difference in these sales go.

The whole situation is pretty stinky:

The IMF has asked the government to clarify several obscure contracts signed by Gécamines, which suggests that state assets have been sold for absurdly low prices…….. This would put the loss to the state at $870 mn.

The Chief Executive of Gécamines, Albert Yuma Mulimbi, has refused all requests, from the Mines Ministry to the IMF and others, to publish the controversial contracts, claiming that as a private company it is not obliged to, even though the state owns all its shares. The government has instructed Yuma, we understand, not to provide the information.

More on this here and here.

The other dimension of the (origins of) Congolese Conflict

UPDATE: Stay updated on the run-up to the elections in the DRC here.

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In reaction to Dodd-Frank many in the blogosphere, including yours truly, have insisted that the problem in eastern Congo is not a law enforcement problem but a governance problem whose solution must come primarily from Kinshasa.

Often ignored is the regional dimension of the conflict.

The involvement of Rwanda and Uganda in eastern DRC (in the first and second Congo wars) have been excellently documented in Dancing in the Glory of Monsters (the author also blogs at Congo Siasa).

The invading forces may have left, but the geopolitical posturing remains and has consequences for the flow of arms and mushrooming of militias in the region.

Here’s a short documentary on the same.

This is not to simply vilify Uganda and Rwanda – one could argue that the presence of rebels from both countries in the Congo provided legitimate grounds for an invasion.

The point here is that the regional dimension of the conflict should not be ignored even as we insist that attention should shift to Kinshasa in an attempt to provide a lasting end to the conflict in eastern DRC.

The Consequences of Dodd-Frank in the Kivus

The dusty streets of Goma, North Kivu’s capital and a mining hub, illustrate Congo’s ills. Metals dealerships dominated the city’s economy until last year but are mostly padlocked now. Repair shops and bars that relied on mining business are empty. So are most public offices. Local government, financed by mining taxes, is insolvent; salaries have not been paid in full for months.

In the past year Goma has suffered a miserable decline. Hundreds of mines in the surrounding countryside have cut output by as much as 95%. At the Humule coltan mine a few gumbooted miners scramble up a red-earth ravine where last year there were thousands. Most stopped coming because they could no longer find buyers for their nuggets of coltan, a metal used in electronic gadgets. They blame what they call “the American law”.

That is the Economist reporting on the mining sector in the DRC.

Dodd-Frank (found here) is a lesson in the failure of solutions imposed from 30,000 feet. As has been stressed by many DRC experts (see Mvemba, Aronson and Seay, for instance), the problem with eastern DRC is not a law enforcement problem but a weak state problem.

With that in mind, it is sad that Joseph Kabila, the man who has failed to pacify the country, is poised for reelection this November. Good governance, even in relatively peaceful and cohesive states, take a long time to evolve. Once can only imagine how much longer Congolese will have to wait before they can get an effective and accountable state.

For  a slightly different opinion check out AFJN.

conflict minerals in the congo

As is now common knowledge, the mineral glut in the DRC has been more a source of pain rather than gain. Minerals have financed both corrupt governments and their cronies in Kinshasa and marauding rebel groups in the ungoverned corners of the vast country.

To over-simply the issue, reforms will have to tackle both angles of the problem, i.e. both Kinshasa and the plethora of armed groups will have to come clean with regard to the extraction and sale of mineral resources. Kinshasa’s hoarding of all the benefits from the trade provides a perverse legitimacy for armed groups to continue their illicit activities.

Jason Stearns, the author of Dancing In the Glory of Monsters [I highly recommend the book], has a post on the complexities surrounding conflict minerals in the DRC.

First, “cautious” is the operative word. The Congolese export ban (September 2010 – March 2011) and the US electronic industry’s embargo of untraced minerals (April 2011 – present) have caused major job losses in the Kivus, as well as played into the hands of a select elite of military commanders, including ICC-indictee Bosco Ntaganda. It is, however, important to point out that neither initiative was caused directly by the Dodd-Frank legislation in the US. Rather, the export ban was decreed by the Congolese presidency, while the industry embargo was an aggressive interpretation of the US legislation. Dodd-Frank call for companies to carry out due diligence and to report their findings; the OECD guidelines call on companies to minimize the risk of financing armed groups.

Secondly, the Malaysia Smelting Corporation (MSC), which I had reported as having signed a deal for the largest tin mines in the Kivus, has not yet officially concluded a deal. A large Congolese delegation visited Malaysia earlier this year, and MSC and their Belgian partners Traxys then came to meet with President Kabila. A “confidentiality agreement” was signed with MSC regarding the Sakima concessions in Maniema, a good place to start as most of the mines there are removed from the main areas of conflict. In addition, MSC has not yet given $10 million for certification an tracing schemes, although the mining minister says they have agreed to fund these initiatives.

More on this on Jason’s blog here.