Euro Bond Fever in Africa In recent years, a growing number of African governments have issued Eurobonds as a way of diversifying away from concessional debt and foreign direct investment. The first country to issue a $750 million Eurobond with an 8.5% coupon rate was Ghana in October 2007, it was the second country after South africa to issue bonds in 30 years. This sparked a sovereign borrowing spree in the region, with every country wanting to borrow through this mechanism unlike the traditional sources of finance via the IMF and World bank as such, nine other countries including Zambia followed suite and issued these euro bonds. The other countries on the list are: Gabon, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia and Tanzania. By February 2013, these ten African economies had collectively raised $8.1 billion from their maiden sovereign-bond issues, with an average maturity of 11.2 years and an average coupon rate of 6.2%. These countries’ existing foreign debt, by contrast, carried an average interest rate of 1.6% with an average maturity of 28.7 years. It is common knowledge that sovereign bonds carry significantly higher borrowing costs than concessional debt does. One would wonder, why are an increasing number of developing countries would rather, issue sovereign-bond than the traditional methods of borrowing. The reasons are simple and straight forward: (1) The conditionality that is associated with traditional borrowing from the IMF and World Bank and other multilateral institutions make their loans less attractive than euro bonds. (2) The conditional loans are not adequacy to help African countries achieve the economic development that is desired. Issuing sovereign-bond is not a bad thing welcome sign but there is need to lean from other countries regarding problems that come with private-sector credit assessments. This could be laying a foundation for future problems. The risks are already growing as most quasi-government institutions all want to borrow from the international market through issuing bonds. The problem will start when the time for making payments is due, there is a lot of evidence pointing to irrational exuberance. Already less than two years after the issue of Congolese, the bonds were trading for 20 cents on the dollar, pushing the yield to a record high. In January 2011, Côte d’Ivoire became the first country to default on its sovereign debt since Jamaica in January 2010. How else can one explain Zambia’s ability to lock in a rate that was lower than the yield on a Spanish bond issue, even though Spain’s credit rating is four grades higher? Signs of default stress are already showing. Government has imposed a freeze on employment as a way of reducing costs- which does not make economic sense especially that the price of copper has not fallen, what will happen when the copper prices go down, like they always do? On one hand, the government wants to grow the economy and improve the lives of the poor but how can that be done when the same government has imposed a job freeze? Economic development cannot happen in the absence of job creation! Furthermore, Jobs are not created through a job freeze. The recent failures of free market economics entails increased role of government in the economy and no other way as such there is need to re- look at the policies and build institutions to support economic development if Zambia is to realize the dreams as outlined by the president in the budget To ensure that their sovereign-bond issues do not turn into a financial disaster, Zambia should put in place a sound, forward-looking, and comprehensive debt-management structure. The issue is not just about investing the proceeds in the right type of high-return projects, but also to ensure that they do not have to borrow further to service their debt. City councils and other quasi-government institutions who want to issue bonds in Zambia can of course, learn from the bitter experience of Detroit, which issued $1.4 billion worth of municipal bonds in 2005 to ward off an impending financial crisis. Unfortunately, the city has continued to borrow, mostly to service its outstanding bonds. In the process, four Wall Street banks that enabled Detroit to issue a total of $3.7 billion in bonds since 2005 have reaped $474 million in underwriting fees, insurance premiums, and swaps. Understanding the risks of excessive private-sector borrowing, the inadequacy of private lenders’ credit assessments, and the conflicts of interest that are endemic in banks, Sub-Saharan countries should impose constraints on such borrowing, especially when there are significant exchange-rate and maturity mismatches. Matters are likely to become worse in the future, because so-called “vulture” funds have learned how use legal instruments to take advantage of countries in distress. Recent court rulings in the United States have given the vultures the upper hand, and may make debt restructuring even more difficult, while enthusiasm for bailouts is clearly waning. The international financial markets believe that both borrowers and lenders have been forewarned. There are no easy, risk-free paths to development and prosperity. But borrowing money from international financial markets is a strategy with enormous downside risks, and only limited upside potential – except for the banks, which take their fees up front. It is only hoped that Zambia will not have to repeat the costly lessons that other developing countries have learned over the past three decades.
Posted on: Sat, 26 Oct 2013 21:29:22 +0000
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