The world’s leading development lender warns that at least 17 African countries are at risk of defaulting on their debt in the event of a global economic downturn – due to the fast pace at which they have been issuing bonds over the past few months.
Kristian Rouz — The World Bank warns of heightened longer-term risks related to the supposedly excessive bond issuance of several African nations, saying high leverage could produce structural problems threatening the fiscal sustainability of such countries. The stark warning comes as many African countries have sought additional sources of financing to advance their development projects.
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According to a statement from the World Bank, the pace of bond issuance by some African nations, including Ghana and Benin, has been too fast and ‘very concerning’ over the past few years. The international lender said bond issuance appears to be a promising strategy, while global borrowing costs are relatively low.
However, if the US Federal Reserve, the European Central Bank (ECB), and other major central banks tighten their interest rate policies, the mounting debt burden could deal a severe blow to the budgets of African countries.
“We are very concerned,” World Bank Chief Executive Officer Kristalina Georgieva said. “We have lived through a long period of low interest rates and low yields and that has made African countries very attractive destinations for those seeking higher yield.”
Georgieva added that global interest rates will inevitably go up at some point, making refinancing harder, if not impossible, for the mostly commodity-driven African economies.
At this point, the most popular financial tool, that meets rife demand from international investors, is the so-called African Eurobond. The World Bank named 17 African nations that have issued ‘excessive’ amounts of these securities.
Georgieva said countries at risk include Chad, Gambia, Mozambique, Republic of Congo, South Sudan, and Zimbabwe. These countries have hardly succeeded at diversifying their economies, and it remains unclear where the money — raised through bond issuance — went.
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Additionally, higher debt-to-GDP ratios make such countries more likely to accept financial aid from third-party countries, such as Mainland China, instead of international institutions — which often attach conditions to their financing packages.
For its part, the World Bank has recently unveiled a $15-billion development programme designed for African countries. The plan aims to improve the human capital in sub-Saharan Africa between the years 2021 and 2023, with new programmes aimed at supporting education, health care, and food security across the region.
“GDP per worker in sub-Saharan Africa could be 2.5 times higher if everyone were healthy and enjoyed a good education from pre-school to secondary school,” Hafez Ghanem, World Bank Vice President for Africa, said.
Not all national governments are willing to cooperate with the World Bank though. Some are not willing to implement the policies recommended by international lenders, expressing concern regarding their sovereignty in domestic affairs; others fear possible structural changes in the economy that could disrupt political stability.
Separately, the World Bank said economic growth in Sub-Saharan Africa has been slowing since 2015, due to the structural problems in the region’s three largest economies — Nigeria, South Africa, and Angola. The lender said, however, that this year growth might pick up, but lack of foreign direct investment and domestic sources of growth — as well as rampant corruption — could thwart such expectations.
The region’s economy could grow 2.8 percent this year, the highest rate since 2015. It remains unclear whether this acceleration is a result of bond issuance and direct borrowing from the likes of China, but World Bank experts suggest that rising global demand for commodities played the most prominent role.
“Our forecast for a rise in growth by 2020 is largely due to an anticipation that commodities and metal prices will continue to recover,” Cesar Calderon, one of the authors of the World Bank’s Africa’s Pulse report, said.
Despite the modest improvement, the World Bank noted that between January and mid-March 2019, developing nations amassed roughly $400 bln in new debt through bond issuance.
This is the region’s highest level of debt year-to-date in history, the lender said, it and might pose an unprecedented structural challenge to the fiscal sustainability of entire regions in the event of a global economic downturn.