The debt of African countries arouses appetite



April 2020. In the midst of the Covid crisis, the creditor member countries of the Paris Club, under the leadership of Emmanuel Macron, decide to suspend the debt of 48 countries, mainly in sub-Saharan Africa. In fact, debts amounting to 13 billion dollars (11.9 billion euros) have their reimbursement deferred, so that the countries concerned can concentrate on health expenditure.

This amount seems relatively low, and for good reason: the countries of the Paris Club, which notably includes the former colonial powers, represent less than 20% of the bilateral debt (State to State, editor’s note) sub-Saharan countries, a debt which now represents only a quarter of the external debt of these countries.

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Two years later, if this emergency measure has been welcomed, many African countries are accumulating difficulties. According to the International Monetary Fund (IMF), more than half of them are in a situation of over-indebtedness or present a “high risk” of over-indebtedness. Worse, no country in the region is now a member of the “low risk” category. In total, these countries owe more than 400 billion dollars (366 billion euros) to their creditors.

Bond market development

Private creditors did not join the initiative to suspend debt service. They are today the main lenders in sub-Saharan Africa. According to the World Bank, in 2019 they held 43% of the external debt of these countries. In the majority of cases, these borrowings take place via the bond market: States, local authorities, banks or large private companies sell their securities there directly to professional investors.

The region’s main source of financing, having skyrocketed over the past ten years, this market hides disparities between countries. Because who says market, says rating, and only the ten best-rated countries regularly borrow in this way. Benin or Côte d’Ivoire have thus been able to run up debt in recent months with rates of between 4 and 5%, over a period of eleven years… By way of comparison, France is currently in debt at less than 1% over ten years.

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The development of the sub-Saharan bond market is a consequence of the favorable macroeconomic context of recent years. The low interest rate policies of Western central banks have prompted some investors, looking for higher returns, to turn to these markets. “On the market, we know the average exit rate (the interest rate, editor’s note)the volume, but not the identity of the creditor, which makes it difficult to know precisely who they are”, explains Thomas Mélonio, director of research at the French Development Agency (AFD).

Rise in rates

“Usually it’s commercial banks, savings funds that are willing to take risks, he continues. These actors are in a logic of diversification. There are only a few traditional pension funds in this market segment, their strategies most often favoring less risky investments. »

However, the trend could turn around. The return of inflation in Europe and the United States, synonymous with the tightening of the credit tap in these States, could lead the American and European central banks to raise their rates, so that their economies remain attractive. This would cause a general increase.

In addition, inflation on the global commodity market, turned upside down by the succession of the Covid crisis and the war in Ukraine, should spread everywhere. For states that combine trade deficit and budget deficit, the rise in the cost of imports will be combined with that of borrowing rates.

“Vulture funds”

Especially since these bonds are generally denominated in dollars, which can increase the debt burden when their national currency depreciates. To protect themselves from this exchange risk, the countries of the CFA franc zone have therefore chosen to issue debt in euros in recent years, their national currency being indexed to the European currency.

In the event of non-payment, recourse to private partners can turn into an obstacle course. Indeed, the debts of countries in default are generally resold, at the risk of landing in the hands of “vulture funds” specialists in recovery. The latter then drag the failing states before the Anglo-Saxon courts, which often agree with them.

International financial institutions, mainly the International Monetary Fund (IMF) and the World Bank, remain valuable players in Africa’s finance, with nearly a third of the financing allocated – however down seven points over the last decade.

Below market rates

Their investment strategies differ. Funding from the IMF aimed above all at putting an end to the disorders in the States’ balance of payments. The World Bank focuses on financing specific, development-oriented projects. The granting of these loans may be conditional, for example, on structural reforms.

International institutions do not lend at market conditions: their loans are said to be concessional. The more a State has difficulty in accessing private financing, the more these institutions are conducive to lending to it – at a more moderate price than a private actor. In 2020, the World Bank provided concessional loans at an average rate of 3.125%, with long maturities and possible grace periods.

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“For the development of these countries, calm, patient investors are needed, with long-term credit at low rates, explains Gregory Smith, former economist at the World Bank, author of Where Credit Is Due (1), an analysis of African debt. This is what the World Bank and the IMF do, for example, but it is not enough to cover the financing needs of these countries. » This funding covers less than a third of the needs related to achieving the Sustainable Development Goals set by the United Nations for 2030.

Faced with this quest for funding, another actor, this one state, has made its place under the African sun for twenty years: China, which has now become one of the main creditors of sub-Saharan Africa.

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African debt, the rule of three

Creditors in the sub-Saharan region can be divided into three categories:

– Private creditors, very widely found on the bond market, and who hold 43% of the debt of these countries. Outstanding debt held by these creditors has increased by 470% since 2006.

– Multilateral creditors, mainly the International Monetary Fund and the World Bank, hold 31% of the debt, the outstanding amount of which has increased by 179% since 2006.

– Bilateral creditors, ie state-to-state: they account for 26% of loans granted to sub-Saharan African countries. Nearly two-thirds (62%) are contracted with China. Outstanding debt held by these creditors has increased by 123% since 2006.

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