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Sub-Saharan African states have borrowed so much money since the debt forgiveness programmes earlier this century that they risk falling back into financial distress, Fitch warned today.
However, the rating agency argued that multilateral debt relief had not been squandered, as some have argued, because it has “ delivered lasting benefits” in the form of faster economic growth and improvements in measures of human development.
Between 2001 and 2015, 36 states, all but six in Africa, had $76bn of debt wiped off as part of the Heavily Indebted Poor Countries and Multilateral Debt Relief Initiatives.
And although some poorly-run countries wasted this windfall, Ed Parker, head of Emea sovereign ratings at Fitch, said “median GDP growth, total investment-to-GDP and countries’ percentile ranking in the UN’s Human Development Index all improved for Fitch-rated sub-Saharan sovereigns after they passed the HIPC completion point relative to pre-HIPC, and also improved relative to sovereigns that have not benefited from the HIPC initiative”.
The UN’s HDI is a measure of health, education and general living standards.
Difficult choices now face many of the countries that received debt relief, however, after a ballooning of sovereign debt.
The median public debt-to-GDP ratio of the 19 sub-Saharan countries rated by Fitch plummeted to just 26.7 per cent in 2012, as a result of the wave of debt forgiveness. However, it has since rebounded to 54.3 per cent as many countries have taken advantage of the fiscal space opened up by debt relief to run larger primary deficits.
This trend has been exacerbated by the impact of a slide in commodity prices from 2014 onwards and weaker currencies in countries with high levels of foreign currency-denominated debt.
In terms of debt-to-government revenues, a measure many view as more relevant, the rebound has been equally stark, from a low of 130 per cent in 2008 to 277 per cent, as shown in the first chart.
As for the cost of repaying that debt, the proportion of Fitch-rated sub-Saharan states with elevated debt service as a share of government revenues is back where it was before the start of the HIPC debt relief initiative in the early 2000s, in part because less of the debt is concessional now, illustrated in the second chart.
“Interest burdens have risen again, similar to the levels where debt relief was granted,” Mr Parker said.
The stock of public debt has jumped to 128 per cent of GDP in Cape Verde, 100 per cent in the Republic of Congo and 94 per cent in Mozambique, with the latter pair having already defaulted in recent years.
In place of the concessional debt from western governments and multilateral development banks that dominated prior to the write-offs, sub-Saharan sovereigns have instead gorged, in part, on funding from China.
Although there are no official data on Chinese lending, the China Africa Research Initiative at Johns Hopkins University estimates that Beijing lent $143bn to African states between 2000 and 2017, illustrated in the third chart, although the stock is likely to be lower due to repayments and restructurings.
A further source of credit has been the eurobond market, where issuance by the Fitch-rated sovereigns (excluding South Africa) has jumped from an average of $1.1bn a year between 2006 and 2012 to $6.9bn from 2013 to 2018, and has already hit $5.7bn so far this year, shown in the fourth chart.
This eurobond debt has often been contracted at high interest rates, Fitch said, while borrowing in domestic capital markets is typically short term, and the terms of Chinese debt are often opaque.
To some, this renewed debt splurge indicates that the debt relief has been squandered, with governments simply going out and rebuilding their debt burdens back to the levels that caused serious problems in the early 2000s.
Mr Parker does not take this view, however. His data suggest those sub-Saharan countries granted debt relief (11 of the 19 it covers in the region) have enjoyed markedly higher economic growth since their write-offs than the countries that did not benefit from forgiveness, depicted in the fifth chart.
Similarly, the 11 beneficiaries have typically risen faster up the rankings in the UN’s Human Development Index, which encompasses measures of health, education and living standards, than their non-HIPC peers, albeit from a lower base, seen in the final chart.
“Pretty much across the board in countries that have benefited from debt relief there has been this pick-up in growth, strong investment and pick-up in the Human Development Index. Across the board there have been improvements in standards of living in Africa as they have used the opportunity that has been afforded them,” said Mr Parker.
Moreover, while the beneficiaries of HIPC spent more on debt service than health and education before their relief programmes, they are now typically spending five times as much on health, education and other social services than on debt service, he added.
Mr Parker cited Rwanda as a good example, with the once war-torn, landlocked nation having seen remarkable improvements in recent years, albeit helped by large doses of development aid and accompanied by rigid, authoritarian rule.
Charles Robertson, chief economist at Renaissance Capital, whose work has shown a strong connection between adult literacy and subsequent economic growth, also believed the debt forgiveness had been beneficial.
Although he accepted it was difficult to “unpick” how much growth was due to debt relief and how much to the 2005-2013 commodities booms, Mr Robertson said: “The fact that governments were able to pay teachers rather than just debt servicing costs . . . explains to me why sub-Saharan Africa has gone through this low commodity price period without the crash and deconvergence we saw in the 1980s, [as] it came at a time when human capital development was putting Africa on a firmer footing.
“Senegal, Ivory Coast, Ethiopia and Zambia have been able to increase investment as China etc could come in and invest without feeling too anxious,” Mr Robertson added. “If you had debt/GDP sitting at 100 per cent would the Chinese have lent so much to these countries? My guess is probably not.”
Overall, Mr Robertson regarded the HIPC programme as a “relatively cheap way of clearing the decks for Africa to build up more investment and therefore lift growth” — particularly as the cost was a fraction of the $330bn later used to bail out Greece.
Nevertheless, across sub-Saharan Africa as a whole Mr Parker argued the gains “could have been greater”, with some countries wasting much of their debt relief windfall on “white elephants, public wages, subsidies or patronage”.
Prominent examples include the Republic of Congo and Mozambique, “where hidden debt was contracted, taking debt to excessive levels [and] leading to defaults”.
Some governments also splurged on public spending to suit a short-term focus on the electoral cycle, with a jump in public sector wages in Ghana ahead of elections in 2012 and 2016 emblematic of this trend.
A key test now will be whether the infrastructure investment afforded by the debt relief really delivers growth-enhancing returns to the supply side of African economies, in particular by increasing exports.
“There is a question mark about the rate of return of some of these investments,” Mr Parker said.
More broadly, many African states are now at a critical juncture, in that there appears to be little scope for debt-fuelled models of growth to continue, given the size of the debt burdens in place.
“There is now limited scope to accumulate non-concessional public debt at such a rapid pace without an increasing risk of debt distress,” said Fitch, which has cut its average sub-Saharan sovereign credit rating from BB- to B+ since 2012, with downgrades outnumbering upgrades by three to one over the period.
“Debt relief was, or was intended to be, a one-off event,” Mr Parker said. “Once the impact is used up then countries cannot continue to accumulate debt at the pace they have in the past. It does leave them with hard choices.”
Gregory Smith, fixed-income strategist at Renaissance Capital, said sub-Saharan sovereign debt was now increasing at a faster clip than in other emerging or frontier markets, and the growing importance of non-Paris Club creditors such as China and India complicated efforts to deal with any necessary restructurings.
“I’m travelling to the Paris Club on Monday to talk about three African sovereigns and whatever we do [about potential future debt restructuring] we are going to have to try to change the global infrastructure,” Mr Smith said, although he did point to the example of Iraq, where China agreed to accept the same haircut as the Paris Club.
From the point of view of eurobond holders, however, Mr Smith said while idiosyncratic problems were likely, he did not expect to see any asset class-wide problems until 2024-25, when a wall of debt maturities is due to hit.
“Nobody expects this debt to be repaid. They expect [African sovereigns] to take out more debt and kick the can down the road, but that depends on the markets being open then,” he said.
However, with the “post-HIPC initiative window of opportunity closing for many countries”, Fitch called on sub-Saharan states to implement reforms, such as raising domestic tax revenues, encouraging foreign direct and private sector investment, implementing growth-enhancing structural reforms and raising standards of governance to reduce leakages through corruption.
“If they continue to contract public debt at such a rapid pace they run an increasing risk of debt distress. They will therefore need to adapt development models to maintain strong growth that is less dependent on debt or accept a slowdown in the pace of GDP growth and HDI improvement.”