Debt Distress in Africa: Be Afraid?

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By Steve Kayizzi-Mugerwa, Dawit Birhanu Tessema

I.  Africa’s Growth-Debt Nexus

As African countries seek today to consolidate their growth through increased foreign borrowing, the words “de ja vu” are frequently cited, with experts’ eyes on the implications for debt distress. Some thirty five years ago, the Latin American economies had enjoyed similarly high growth levels buttressed by large inflows from US private banks, at sub-prime rates. While the latter helped close the region’s current account deficits, following the oil-price shocks of the 1970s, they also escalated the debt overhang. In the first half of the 1980s, Latin American debt had increased tenfold from the previous decade to USD 320 billion. Subsequent external economic shocks and increases in US benchmark interest rates sucked capital out of the region, leading to a string of sovereign defaults.

Although African economies have enjoyed a decade of high growth, increased foreign and domestic investment and strong domestic consumption, analysts see the recent evolution of the debt burden as similar to that of Latin America in the 1980s. African countries are now more integrated in international financial markets, while risk profiles have improved as shown by increases in investor appetite for Africa’s sovereign debt issues in recent years, at historically low rates [1].

Compared to the past, when countries were confined to borrowing from bilateral and multilateral public lenders, many countries have today direct access to financial markets. But as growth rates begin to taper off in Asia, there are concerns over the medium-long term sustainability of Africa’s recent borrowing activity, although, it must be remarked, the continent’s debt levels are nowhere near those of the much bigger economies of Latin America at the height of their crises in the 1980s. 

That the US Fed will raise rates before the end of 2015 is now almost a foregone conclusion, although the exact date and amounts are still unknown [2]. Inevitably, speculative bets with potentially detrimental effects for emerging economies have resulted—notably the premium between emerging-market debt and U.S. Treasuries had widened to 330 basis points by June 2015 [3]. Likewise, the US dollar has appreciated by some 10 percent against major currencies and by much more against those of emerging markets (see figure 1). The strengthening dollar has encouraged investors to liquidate commodity contracts in favour of US Treasury bills, with important implications for natural resource exports from Africa.

Looking ahead, foreign portfolio investment in Africa will likely rebalance in response to the strong dollar. Lower US dollar adjusted returns might force the fickle investors to seek better returns elsewhere – a form of flight to safety. The outflow could be sizeable, nevertheless, given the rather large proportion of foreign portfolio investment in Africa’s stock markets (see table 1). For countries like South Africa, this would not be the first time. In November 2013, in the earlier days of Fed tapering, the country saw outflows estimated at some USD 1.65 billion [4].

Table 1. Returns in African stock markets 


US Dollar adjusted returns 

(as of May 31, 2015)

Investor Type

As of 2013

1 month

1 year

3 year

Foreign Investors

Local Investors

Market Cap

(% of GDP)

Botswana Stock Exchange







Dar-es-Salaam Stock Exchange







Ghana Stock Exchange







Johannesburg Stock Exchange







Lusaka Stock Exchange







Nairobi Securities Exchange







Nigerian Stock Exchange







Rwanda Stock Exchange







Stock Exchange of Mauritius







Uganda Securities Exchange







Zimbabwe Stock Exchange







 Source: Bloomberg, African Securities Association

II. Debt Distress in the Medium Term? Policies will tell.

Africa’s external debt has remained low in the past decade thanks to HIPC and higher levels of growth in past decade. Nevertheless, Africa’s sovereign bond issues (including South Africa) now make up about 4 percent of developing country debt compared to less than 1 percent over a decade ago [5]. Elevated levels of foreign currency borrowing have the potential to cause currency mismatches when speculative shocks occur. 

Today, a third of African countries have debt to GDP ratios in excess of 40 percent [6]. The outstanding sovereign debt for Africa as a whole increased 2.6 times between 2009Q2 and 2015Q2. In contrast, total debt in developing countries rose 2.3 times over the same period. The appreciation of the dollar has raised the nominal currency values of dollar denominated debts. Thus Africa’s outstanding bond debt is already 29 percent higher today in real terms than it would have been had the dollar remained at its March 2011 level (see fig 2). The increase in debt is also true of many emerging market economies that have contracted dollar denominated debt over the past five years. However, not all debtor countries in Africa face the same risk of indebtedness, as fundamentals are country specific.

Africa has undoubtedly experienced a concurrence of global economic headwinds in recent years, including declining global demand, unfavourable commodity prices and the likelihood of further dollar appreciation, that have increased the risk of debt distress. Declining gold and cocoa prices and rising fiscal and trade deficits prompted Ghana, for example, to request for a bridge loan from the Fund [7]. Zambia is facing similar headwinds [8]. Copper prices have declined by 19 percent year-on-year (June) and the government budget is under stress from obligations related to fuel and agricultural subsidies.

The notion that governments can spend on growth inducing infrastructure projects is now well ingrained in Africa’s development debate. It will nevertheless be important to put in place a good institutional framework for debt management to prevent the risk of debt distress. In strategic terms, the absence of such a mechanism was as much to blame for the debt distress of the past as the size of country indebtedness. Debt distress will become a serious issues if funds for infrastructure investment are used to bridge the fiscal deficit of the government and for public consumption, as was the case with Latin America in the 1980s. However, the surprise is how well other African countries have generally managed to contain external shocks, and to embark once again on building reserves and related fiscal buffers.

In the medium-term, African countries should seriously assess the benefits of international sovereign bond issuance vis-à-vis other forms of finance. Recent developments have shown that the threats of foreign and domestic currency denominated debt mismatches are real. Kenya and other countries have shown on the other hand that there is potential for Africa’s local currency bond market to raise funds for capital projects, although the volume of issues is still limited. Here is a source that could provide a robust and sustainable means of domestic capital financing, while not subjecting countries to the same risk of debt distress.


[1]. The debut sovereign bonds of Gabon, Ghana, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania-had an average coupon rate of 6.2 percent

[2]. Press release by the Board of Governors of the Federal Reserve System, June 17, 2015.

[3]. J.P. Morgan & Co. Indices (2015)

[4]. Bloomberg (2013). “Rand Weakens After Record Streak of South African Bond Outflows”. December 6.

[5]. Bank for International Settlement (2015). Debt Security Statistics.

[6]. African Economic Outlook (2015). Statistical Annex.

[7]. IMF (2015). Press Release No. 15/159.

[8]. Bloomberg (2015). “Zambia Debt Costs Set to Soar After Budget Call.” June 17.


Sétoc - Côte d’Ivoire 17/09/2015 19:10
En dehors de tous ces chiffres encourageants au point de vue de l'économie, la réalité est que au point de vue social les Africains sont de plus en plus misérables (famine, maladie, en général pauvreté). Comment expliquer une telle dégénérescence avec le "surendettement"?