Op-Ed: The debt ensemble plays on in 2017

PUBLISHED: Wed, 11 Jan 2017 09:05:37 GMT

Much of Sub-Saharan Africa’s debt is “within control” many policymakers keep reminding us. But here is my worry, sovereign debt of the region continues to rise and many analysts don’t see debt levels and debt servicing costs diminishing in 2017.

See the 2000s were great for Sub-Saharan Africa. First, the boom in commodity prices led to a considerable improvement in the fiscal position of its commodity exporters. Second, the reduction in debt levels brought about by the Heavily Indebted Poor Countries/Multilateral Debt Relief Initiative allowed many Sub-Saharan African countries to get a breather with their debt cut to almost zero. Fast forward to last year, and the forgiven debt is soaring again.

In less than five years, Sub-Saharan Africa’s debt to GDP median ratio rose from about 30.2% in 2011 to 49% in 2015. According to seasoned economist and now Governor of the Kenyan Central Bank, Patrick Njoroge, the debt is still manageable (and going with the rating scale of an economy that has attained B rating from a sovereign rating agency, 50.3% is still decent for Kenya) but we should look more closely not at the simple figure of Debt to GDP ratio, but the level of debt distress and indicators to that regard.

This poses underlying questions like is the country about to default or is the debt manageable? In my view, Kenyan debt has two issues; prominence of domestic debt markets, which in turn have relatively higher interest rates (notwithstanding the USD2.2bn in the pipeline) and second, interest payments soaring to 14.2% of revenues which is above the B median of 8%. Now going with Fitch Credit Rating’s scale which does the sovereign rating for Kenya, to evade debt servicing distress to the B economy, interest payments should be kept well below the 8% average. Again, these are manageable concerns on paper, in a perfect economy. But applying this prescription to the rest of the region, we have a problem.

Mozambique with all her woes takes the prize for a gloomy mid-term. A decade ago, Mozambique’s growth was revered across the globe but following the undeclared debt fiasco totaling $1.1 Billion from Credit Suisse and VTB Bank last year, many investors have been left shunning the government paper and any prospect of Foreign Direct Investment until debt servicing protocols are addressed.  Recently, the nation acknowledged that there is need to restructure her debt if any aid was to trickle in. According to Fitch Ratings, the binge in Mozambique’s debt saw her debt to GDP ratio rise from37.7%in 2011 to130%in 2016. Speaking to Jan Friederich, the Senior Director and Head of Middle East and Africa Sovereigns last month, he made it clear that government borrowing will only be economically constructive if the funds borrowed are deployed in sectors which ultimately aid in servicing the debt in question.

Economies like Ghana and Rwanda which are eying FDI driven growth in the Long to medium term have done just that by taking out facilities from the IMF to service their debt. One might wonder if this makes sense in the mid-term but it is particularly feasible for economies eying Foreign Direct Investment to have their debt in check thus the move to borrow to service debt.

One of the more popular prescriptions from the IMF is: “Countries that are still growing rapidly should rebuild buffers in comparatively favorable times to stem the increase in public debt.” Perusing our table above though, net oil Importers like Kenya, Rwanda and Uganda’s Debt projections are only climbing through to 2017.

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