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.

Gbagbo’s departure imminent

Laurent Gbagbo, former president of Cote d’Ivoire who refuses to step down despite losing an election, faces imminent departure. According to the BBC and the Times, his own army chief (Phillippe Mangou) and other members of the security forces have already defected from his camp. The rebel forces loyal to Alassane Ouattara, the internationally recognized president of Cote d’Ivoire, are closing in on Abidjan, the commercial capital. The rebels are already in control of Yamoussoukro, the capital, and the important port of San Pedor. Mr. Gbagbo has been illegally exporting cocoa from the port in violation of a UN embargo. Gbagbo’s home town, Gagnoa, has also fallen to the rebels.

The only question left is what should happen to Mr. Gbagbo after he leaves the Ivorian presidency. His refusal to leave office after losing an election has already led to the death of hundreds of civilians. The most gruesome example of his lack of concern for his own countrymen is when he ordered his soldiers to fire mortars at a local market in Abidjan. Dozens, most of them women traders, were killed. An estimated one million people have fled their homes. In my view Mr. Gbabgo should stand trial for crimes against humanity, IN ABIDJAN, in order to serve as an example for other African autocrats that elections have consequences.

Mr. Gbagbo should not be part of any unity government.

In addition, an inquiry should be made into who exactly funded his months long attempt at supplanting Ivorian electoral democracy. The likes of Edwardo dos Santos of Angola and Robert Mugabe of Zimbabwe (who reportedly sent him weapons) should also face penalties – even if just adverse mentions – for their role in aiding and abetting a murderous autocrat.

More on this at the FP

angola – another chance for democracy in africa

The sunny optimism that greeted the democratic awakening in Africa in the early nineties may be nearing twilight but there is still hope. Even as states like Kenya, Zimbabwe and even Senegal waver in their quest for liberal democracy, there is still a sliver of hope in the likes of Angola – a former war zone which holds elections tomorrow.

Angola has been for some time one of the fastest growing countries in the world. It is Africa’s soon to be largest oil producer (mainly because the Nigerian behemoth can’t get its act together) and with the help of the Chinese has recently embarked on a mission to build infrastructure throughout the country. The wealth may not be evenly shared out, but the country as a whole is better off than it was a decade or so ago.

So it is really hopeful that they will be having elections tomorrow. Yes there will be problems. Dos Santos has all the power in Angola and will definitely not hold completely free and fair elections. But this is a start. A few times over and the Angolans will internalize voting as a human right and realize their duty and moral call to chart the way forward for themselves through the ballot.

I am almost certain that Dos Santos’ MPLA will win the Friday election. But UNITA should not give up. Democracy is as cultural as it is political. Their time will come. Get to parliament, constructively oppose the government and be the watch-dog for the people. And help spread the idea that Africans are and ought to be in charge of their lives. Not governments. Certainly not NGOs. Not the church. Not the West. But Africans. Africans in Angola, Africans in Sudan, Africans in all war-ravaged regions of the continent.