allAfrica
By Carlos Lopes - The Executive
Secretary's Blog
The
domino effect of five central banks - Denmark, Switzerland, the European
Central bank, the bank of Japan and more recently Sweden, slashing interest
rates to sub – zero levels has certainly given many the chills. Viewed as a
desperate move to stimulate growth by rewarding spending and penalizing savings
– it is in fact more related to the unsustainability of public expenditure
modelled for a demographic curve that is no longer there. An ageing population
whose workforce is weak and has low productivity is coming to surface. The
world seems to be gripped with the psychological fear of another looming global
debt crisis. This is hardly surprising. Analysts and political leaders refuse
to discuss population trends because the reality is very difficult to reconcile
with populism and short term expediency.
In the last decade growth seem to be shifting to emerging
economies, but all of the sudden the BRICS, with one exception, India, got
engulfed in the same patterns as those they rivalled. It is no coincidence they
too, with precisely the Indian exception are facing a diminishing of their
labour force in the near future.
Yet in this whirlwind, growth will have to come from somewhere.
Africa's growth has been driven by investors seeking high returns and
opportunities rooted in a number of mega trends. These include a sizeable
number of consumers, that will be almost as large as the Americas and Europe
population combined by 2025; a rising middle class coupled with a rapid
urbanization with eager consumers expected to spend about USD1 trillion by
2020; and a young population that will constitute over a quarter of the world's
labour force by 2050.
In addition to reforms, Africa's financial sector has also
matured wetting the appetite for sovereign bonds – now at the center of the
continent's debt sustainability discussion. This trend in particular has
created the buzz about another debt crisis looming in Africa. When we talk of
debt sustainability, the agreed definition is whether a country can meet its
current and future debt service obligations in full, without recourse to debt
relief, rescheduling or accumulation of arrears.
It is important to give some context with regards to Africa's
past indebtedness. Contrary to common perception, Africa's past
over-indebtedness was not solely attributable to the continent's poor
governance, corruption or conflict, as most would have you believe. Other
contributing factors include cold war geopolitics; relatively poor fiscal
policies and negative real interest rates in industrial countries, which in
turn encouraged developing countries to go on a borrowing spree; as well as
easy credit access, particularly to oil-exporting countries, that in hindsight
seemed to be helping industrial countries adjust to the two oil-shocks of the
1970's. A long drawn global recession caused commodity markets and prices to
collapse. Volatile exchange rate movements saw Africa's debts appreciated
against the US dollar. Adding to this potent cocktail, protectionist policies
in the world's markets stood in Africa's way to escape the debt trap. With
onerous debt service burdens, a vicious cycle began: African countries taking
on new loans to repay old ones. More was actually being spent on servicing debt
than any other expenditure or investment category. By 2012, African countries
were still spending about 10 percent of their export earnings on servicing
external debt, an improvement from the 40 per cent plus of the 1990s.
Interestingly, the continent's total external debt as a
percentage of GDP has actually been declining in Africa since the Monterrey
consensus of 2002 that launched debt relief through the Heavily Indebted Poor
Country (HIPC) scheme, and the Multilateral Debt Relief Initiative (MDRI).
Together they helped 35 African countries cancel USD100 billion of external
debt.
Africa's total foreign debt has
been higher than 30 percent of GDP since 2010 and it was projected to have risen
to 37.1 percent by the end of 2015. However, net foreign debt as a share of GDP
is only 1 per cent, having been negative since 2006 because of Africa's
international reserves (1). For example, net foreign debt as a share of
GDP in Algeria has averaged -82.3 percent since 2010.
New Development Financing Models for Africa
With regards toAfrica's total
public debt-to-GDP, figures have hovered above 30 percent of GDP since 2006 and
with gradual increases taking place between 2010 and 2014. Even then, it is
still lower than recorded in previous decades standing at 38 percent as of 2014
(2).
This debt level is also comparable to other developing countries and is well
below that of advanced economies. For example, the total debt for OECD
countries was nearly 80 percent of the OECD GDP in 2008 and was expected to
grow to 111.2 percent in 2015 (3). The champion of debt is
Japan with GDP/debt ratio of 230 percent.
So why is the talk of debt pressure coming from?
Prior to 2009 sovereign bonds issued by African countries were
negligible. The current stock is over USD18 billion. This amount actually is
not reflective of incompetent governments building up unsustainable levels of
debt but rather reasonable borrowers taking advantage of low interest rates to
finance growth. The bad move was to not take into account the volatility of the
exchange rates and currency markets. African governments are expected to
experience up to USD10.8 billion in losses or the equivalent to 1.1 percent of
the region's GDP on sovereign bonds that they issued in 2013 and 2014, due
largely to exchange rate risks.
Changes in macroeconomic
fundamentals, such as a collapse in commodity prices, can also affect sovereign
debt significantly (4).
Sovereign debt is driven by advanced and powerful economies asynchronous
monetary policies. Defaulting is always risky – while governments may forgive
debt, private investors certainly don't; conditions are more stringent to meet
maturity deadlines. There is no coherent mechanism to govern any future
sovereign debt crises. Creditor specific mechanisms used to facilitate past debt
restructurings are no longer available. Although a sovereign debt restructuring
mechanism was proposed by the IMF more than a decade ago, there is still no
international agreement on the topic to date. There is a general consensus that
the existing rules are too creditor-friendly, but that a push for an
international agreement that is too borrower friendly might not be the best way
forward. Any global agreement should therefore strike the right balance5.
The bottom line is that debt will be exacerbated in countries
with weak fiscal discipline and for those who over borrow and pay little
attention to repayments. Individual governments must build debt management
capacity and be held accountable for the effective use of borrowed funds. This
includesassessing any expansion in borrowing within the context of a
comprehensive medium-term strategy for sovereign debt management.
Finally there is need for flexibility in placing debt ceilings
and assessing debt. African countries should not be over-constrained or unduly
deprived. The issue of debt sustainability will essentially depend on a
comprehensive treatment of all components of debt in a debt restructuring, and
the provision of clear mechanism to engage all stakeholders to build up
consensus on how to close the gaps in financial architecture. This is going to
be difficult for rich countries to accept. It requires facing the real
structural problems they have through ageing.
If the answer is to pay the banks to keep the money, OECD
countries will show they don't believe in the future. Africa does not have that
luxury.
This article was published in French online in NotreAfrik magazine of 23 February 2016
(1) Economic Commission for
Africa (2015). Industrializing through trade. Addis Ababa, UNECA.
(2) Data set from EIU, 2016
(4) Hilscher, J. and Y.
Nosbusch (2010). Determinants of Sovereign Risk: Macroeconomic Fundamentals
andthe Pricing of Sovereign Debt, London School of Economics, UK.
No comments:
Post a Comment