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.

Nairobi-Lusaka by road, Part I

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The towering Uhuru Heights under construction in Dar es Salaam combines office space with residential apartments

Lusaka must be the only African capital (or major city) that is not a frenzied construction site. No new major roads are being constructed downtown. My quick look only found two new constructions of tall-ish buildings downtown. Lusaka feels really sleepy compared to the three other African capitals/major cities that I have been to in the last three months  – Dar es Salaam, Nairobi, Accra. Dar es Salaam, in particular, is impressive. The city is constructing a rapid bus transportation system with a dedicated lane. Citywide construction of “office space cum residential apartments” mark the landscape promising a rich experience of downtown living for city residents in the near future (I wish Nairobi did more of this….)

The guy who runs the place I am staying at in Lusaka tells me that the only construction going on in town is of shopping malls and expensive residential houses that no one will afford. President Michael Sata, he argues, is bent on turning Zambia into Zimbabwe.

Michael Sata (a.k.a King Cobra) may not go the way of uncle Bob in Zim but he is definitely not the hope for change that Zambians voted for back in 2011. The growth in the economy (6% on average in the last decade, 7.3% last year) is barely trickling down and the ruling PF seems too preoccupied with killing the opposition to care. The old duo of  Scott and Sata seem out of ideas on how to translate the country’s economic growth into wider socio-economic transformation.

Indeed the African Development Bank in its latest report on the Zambian economy noted that “Zambia has yet to achieve significant gains in social and human development. The poverty headcount remains high, with about 60% of the population still living below the poverty line.” The economy is imbalanced, heavily dependent of capital-intensive copper mining that it barely taxes (80% of exports, but paltry a 6% of revenue).

I was first here two years ago for reconnaissance research and have come back for more work. The pace is a nice change from Nairobi. It is also warmer than Nairobi at this time of the year (well at least before nightfall) – just after three years in California and seven months in Nairobi and I have become a little soft on cold weather (Moving to Chicago this fall will be fun!!)

This time round instead of doing air (Nairobi-Dar), rail (Dar-Kapiri) and road (Kapiri-Lusaka), I decided to do it all by road. This turned out to be a terrible idea.

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Sign post on the Tanzanian side of Namanga

Leaving Nairobi was itself an adventure. Despite Vanessa’s well-intentioned “alarm clock” calls to make sure I was up and ready by 5 AM, I missed my bus (I also missed my bus the first time, which is why I flew to Dar es Salaam). However, this time round it was my dad who was dropping me off and because he is a lot more daring that me and my brother, he decided to chase the bus (we were barely five minutes late, thank you very much Nairobi traffic at 5:45 AM). We did not catch my bus (Dar Express), but caught up with its competitor (name withheld for legal reasons, see below) after it had been stopped by the traffic police on Mombasa road for lack of a passenger license (it had a cargo license). Let’s just say that I was mightily impressed by my dad’s driving skills. I wish I were as daring.

So after the police got their cut (which I later found out was Kshs 5000, about US $60) we set off on the journey to Dar. The conductor on the new bus was kind enough to give me a free ride to Namanga (only Tanzanians can do this!!!) with hopes of catching up with Dar Express – in the end we did not, and I had to pay Kshs 2000 for the rest of the journey. The last time I was on the Nairobi-Arusha road was in 2009 when it was all no more than a dirt track that left you caked in thick red-brown dust. Now it is all paved. Nairobi-Namanga took a dizzying three hours. Just over an hour and a half after that we were in Arusha. After Arusha we sped to Moshi where we were caught up in the Prime Minister’s motorcade as he went to the city referral hospital to visit victims of the recent bombing at an opposition rally in Arusha (Arusha is the Chadema (Tanzania’s main opposition party) stronghold; but even in Dar the few people I spoke to about politics did not have nice things to say about the CCM government, especially with regard to rising inequality and corruption – yeah, I just totally Tom-Friedmanned that one).

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The 922 kilometer (573 miles) Nairobi-Dar road

I must say that the Nairobi-Dar road is impressive. Save for about one hour total of patches that were still being done about two hours outside of Moshi, most of the road is paved. Sometimes I forget how massive (and hence empty) Tanzania is. Namanga-Arusha is marked by flat plains, rolling hills and mountains. In the plains cattle rearing appeared to be the economic mainstay (unfortunately, with school age kids herding tens of cattle and sheep – wake up, Tanzania ministry of education). The hilly and mountainous areas mostly have maize and coffee. After the hills there are vast sisal plantations that stretch from horizon to horizon. Arusha and Moshi are the only big towns on the Namanga-Dar route. I particularly like Moshi (or may be I just don’t like touristy, expensive Arusha). It is a town with character, combining a provincial feeling with urban comforts. It also has some nice public monuments.

I rarely see weigh bridges on Kenyan roads (besides the infamous two in Gilgil and on Mombasa road) but in Tanzania they are plenty. And they are not just for the trucks, but also cater for passenger buses. Most of the trucks on the route were connecting Uganda, Rwanda, Burundi and the eastern DRC to the port in Dar. The passengers on the bus consisted of businesspeople (mostly Kenyans and Congolese), random travelers like myself, and tourists (most of who alighted at Arusha). On the Kenyan side, between Nairobi and Namanga we had a total of 5 police stops. On the Tanzanian side between Namanga and Dar there were 6 police stops and about 4-5 weigh bridge stops – the Tanzanians definitely police their roads more keenly. The police on the Tanzanian side were on the lookout for khat/miraa (illegal in Tanzania, and a beloved commodity of truckers) from Kenya and other contraband. True to EAC hospitality, I did not have any problems with immigration at Namanga (unlike in Nakonde, Zambia) or at any of the police check points (officers came on board to check passports). Talking to Tanzanians reminded me of just how bad Kenyan Swahili is – we must sound to Tanzanians like the Congolese sound to us whenever they speak whatever it is they call Swahili (*ducks and runs*).

The bus arrived in Dar es Salaam about 20 hours after leaving Nairobi (Not bad for a US $42 ticket), despite having been made to believe that the trip would take 13 hours. It didn’t help that I ignored Vanessa’s advice to pack food, hoping to buy stuff on the road – the first food stop was six hours into the trip, I had not had breakfast. Exhausted, hungry and mad at myself for taking the hard way to Dar I decided to get a room at the Peacock Hotel. It is not fancy (probably a 4 star?) but it has hot water, the rooms are spacious, and there’s fast internet. They also have a nice restaurant downstairs (Tausi) and are within walking distance to the port and other sites of interest in Dar – a Subway, Indian restaurant, the national library, banks, etc.

I had a day to burn in Dar reading, writing and walking around in readiness for the second leg of my trip to Lusaka, again by road.

Happy Independence Day to all the Zambians out there!

Image source: Wikipedia

What does a Sata Presidency Mean for Zambia?

UPDATE:

For a closer take on the Sino-Zambian connection check out Louise Redvers’ piece for the BBC.

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So the Economist beat me to writing about what a Sata presidency means for the Zambian economy, especially with regard to foreign investment.

For the two of you out there who are not conversant with the campaign details in the Zambian election, Mr. Sata’s main campaign strategy involved characterizing incumbent President Banda as someone who was out to mortgage Zambia’s future to foreign investors, and especially China.

Here is what the Economist had to say:

“He is too savvy a politician not to realise how much this impoverished country of 13m people needs China’s cash. Over the past decade, the Chinese have invested over $2 billion in Zambia, the GDP of which is only $16 billion. More than half of that came in last year. And China is committed to pouring in billions more. There are now about 300 Chinese companies in Zambia, most of them privately owned, employing around 25,000 locals. Standards differ: some companies treat their workers badly, but most of the big state-owned companies genuinely seek to respect local labour laws.”

The long and short of it is that Sata will definitely kick out a few shady companies that were operating outside the law – and these are not just Chinese firms; the South Africans and Australians also have some shady businesses in Zambia. The former, especially, have a lot of money-laundering operations.

More on this here and here.

On the democracy and governance front, things won’t change much. President Sata’s camp is full of recycled UNIP veterans. UNIP was the independence party that ruled Zambia between 1964 and 1991. Mr. Sata, however, could surprise us by finally passing through a new constitution for Zambia. The last parliament killed the proposed constitution.

when dictators’ oracles fail them

One of the biggest problems in dictatorships is the dearth of dependable information. This problem affects both dictators and their oppressed subjects alike. The same applies to presidents in electoral regimes who surround themselves with “yes men,” the latter who are oftentimes more concerned about pleasing their patron than giving him the right information.

This cartoon from the Daily Nation exemplifies the surprise from some quarters that greeted Rupiah Banda’s defeat in the just concluded tripartite elections in Zambia.

Former president Banda might have been a victim of misinformation, above and beyond the fact that the opposition Patriotic Front run a skillfully crafted campaign complete with this mega hit (in Zambia at least).

HT African Arguments

Quick hits

The world marathon record is back in Kenya, where it belongs.

Zambian Economist has nice maps showing the results of the just concluded general elections.

(Dada) Kim on Haba na Haba has a story on the continuing decline of Malawi into overt and brutal dictatorship. President Bingu wa Mutharika recently appointment his wife and brother to the cabinet. This reminded me of this paper on the inefficient extraction of rents by dictators.

President Zuma of South Africa still hasn’t established his dominance within the ANC (and probably never will).

The drought in the Horn has thus far claimed 10,000 lives. The Bank is increasing its aid package to the region.

Sata is Zambia’s president-elect

NB: Still hoping from airport to airport and will give my reaction to the Sata victory when I finally get back to Palo Alto on Friday evening Pacific Time.

Michael Sata of the Patriotic Front is the new president of Zambia. Mr. Sata beat incumbent president Banda after getting 43% of the declared results in the just concluded general elections in Zambia.

As was expected, the high turnout (from the numbers I have, low 60s), favored Mr. Sata. In the last election turnout was a dismal 45%.

For more of this read the Post.

 

Zambian Election Results

UPDATE:

Sata is leading 47% – 34% in the latest confirmed results from the electoral commission of Zambia. Most of these confirmed results are from Sata strongholds. Banda will almost definitely narrow the gap once the numbers from his base get put on the board.

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Results (not yet confirmed by the electoral commission of Zambia) posted on Zambian Economist indicate that PF has won 49/150, MMD 13/150 and UPND 4/150 of of the 66 constituencies with results.

It looks like turnout was high in the election (might reach the low 60s) which is good for the opposition Patriotic Front. PF will definitely be the biggest political party in parliament. Preliminary presidential results are expected to be announced later this evening. From back of the envelope calculation of the already announced constituency results it appears that Sata is ahead by a sizable margin.

It is important to remember that most of the results are from the urban areas of Zambia. The MMD and Mr. Banda will definitely have a strong showing once the results from the countryside start trickling in.

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Unconfirmed reports indicate that PF has scooped all 22 seats on the Copperbelt, all the seats in Lusaka, 12 out of 14 in Luapula.

Banda has a wide lead in Eastern Province. MMD has apparently won all seats except one.

Turnout numbers are still not here yet. Presidential results still under wraps. Will update as I get more results.

outcome of Zambian elections remains uncertain

The Zambian elections remain a toss up.

So why is this so?

See this earlier post for reasons why the opposition might fail to dislodge MMD from power.

In addition, it is hard to tell what will happen because of PF’s campaign strategy of “don’t kubeba” (don’t tell them). Realizing that it is being outspent by spades in the election, PF has adopted a tactic of actively encouraging Zambians to falsify their party preferences. They’ve urged their supporters to attend MMD rallies, take their money and chitenges but not tell them who they are voting for. It remains to be seen if this strategy has achieved its goal or not.

Here are a few scenarios that might play out in tomorrow’s polls:

  • High turnout with PF winning: A high turnout will definitely favor the opposition Patriotic Front (PF). With a high turnout the party will be able to run up the numbers in urban centres and give the ruling party, MMD, no chance of making up for the gap with rural votes.
  • High turnout with MMD winning: An MMD victory after a high turnout will create a tricky situation. The numbers would simply not add up. Mr. Banda has lost enough ground in the last several months (including most crucially in Western Province over the Barotse Land Agreement) to make it very difficult for him to win after a high turnout. This scenario presents a high likelihood of violence in urban areas and particularly in the Copperbelt.
  • Low turnout: A low turnout will almost certainly result in an MMD victory. With a low turnout the PF will not get enough votes to beat MMD’s overwhelming presence in the rural areas. There will also be little likelihood of violence since voters will have revealed their preference for the status quo. This is not an entirely strange outcome since the Zambian economy has averaged a growth rate of over 6% in the last three years.

It is hard to tell which scenario will play out tomorrow. It all hinges on the turnout numbers.

more on the zambian elections

Check out African Arguments for a brief backgrounder.

The election remains too close to call, which means that Banda is winning.

Given how stacked things are against the opposition, they can only win if they do so convincingly. If it is close (like it was in 2008 when the president won by just over 30,000 votes) the electoral commission will be under immense pressure to hand the ruling party, MMD, the win.

Mr. Sata (the main opposition (PF) candidate) has urged his supporters to stay at polling stations to monitor the tallying and relay of results. I understand there will be an NGO-led parallel vote tallying (but which won’t be publicized because of govt. sanctions). I hope I can get a hold of these results before the end of the week. The electoral commission of Zambia has promised to release the results within 48 hours of the polls closing – that is Thursday evening.

In Lusaka everything is slowing down in readiness for the elections. There is a sense that there will be isolated violence in some parts of the city but nothing too serious. From what I gather the Copperbelt is the region most at risk of election-related violence. People there have (or believe that they do) the most to gain if PF wins (The Copperbelt is also majority Bemba. Mr. Sata is a Bemba speaker).

The MMD’s privatization drive (of the mining sector) since the early 1990s has hit this region the most. Many lost their sinecures in parastatals;  free medicare and schooling disappeared; and there is also a sense that foreigners are benefiting at the expense of ordinary Zambians in the region. Mr. Sata has promised to channel more resources from the mining sector into social programs and a more aggressive job drive.

This is largely campaign hot air but it appears to be sticking. The MMD will be lucky if it gets even a single parliamentary seat in the Copperbelt.