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Ending the Drought: Africa's Return to International Debt Markets

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On 12 February, the Kenyan government added momentum to Africa’s return to international debt markets by successfully issuing a USD 1.5 billion Eurobond. The issuance followed similar moves by Côte d’Ivoire and Benin which came to market on 23 January and 6 February respectively, together raising USD 3.35 billion. Côte d’Ivoire surprised many investors by experimenting with its first – and Africa’s second – sustainable dollar-bond to raise USD 1.1 billion. This ended a two-year hiatus for African issuers, which had seen their borrowing costs spike amid compounding shocks: a global pandemic, conflict between Ukraine and Russia, and policy tightening across developed markets.

Going into 2024 these pressures are easing, while debt offices and their advisors anticipate a much more conducive backdrop for African sovereigns. Perhaps most crucial are investor expectations that the world’s most influential central banks will begin loosening policy this year, making “risk assets” relatively more attractive. US treasury yields ended 2023 only marginally higher than they started it, despite significant moves throughout the year. Going forward, stickier-than-anticipated inflation in rich countries could temporarily close the window for African issuers as investors adjust their expectations; many will therefore be pleased with Kenya’s proactive debt management given its reputation as a laggard. Nonetheless, factors are finally aligning for more African governments to reconsider Eurobonds as they lay out financing plans for their budgets this year.

Negative attitudes towards debt will harden

However, among African electorates there is growing concern over the costs of servicing existing debt obligations and the extent to which that crowds out priority spending on development. This year’s Eurobond issuances will almost certainly feed into that narrative. Benin will pay a 8.375 percent coupon on its debut dollar-bond, while Côte d’Ivoire’s two bonds fetched 7.625 percent and 8.25 percent respectively – materially higher than previous issuances and closing in on the symbolic 9 percent mark considered to be a limit for responsible borrowers. Kenya is testing that thesis having settled on a 9.75 percent coupon, although it will effectively pay 10.375 percent after selling its bond at a discount. While investors assess their long-term repayment prospects at these rates, African governments’ development budgets will inevitably shoulder the burden of fiscal consolidation efforts. This provides ammunition to debt relief campaigners, opposition parties, and high-level calls for an overhaul of international lending architecture.

Domestic politics around debt is already well-established across the continent as citizens question the second order effects of expensive borrowing: unfulfilled project pledges, austerity policies, and anxiety in local financial sectors. In October 2023, Ghanaian protestors took to the streets to demand the removal of the country’s central bank governor, complaining about the country’s debt stock which stood at USD 50 billion at the time. Similarly, Tunisia has experienced anti-IMF demonstrations over the last five years, with more expected as the government edges closer to a deal with the Fund to avert a potential debt crisis.

As debt service paying continue to crowd out essential development spending, the politics will become more difficult for governments to manage. Administrations in countries with established traditions of protest will struggle most, along with parties governing on weak mandates or those faced with an opposition willing to weaponize the issue as they head to elections. Several Kenyan politicians, including official opposition leader Rail Odinga, campaigned on a restructuring of the country’s debt as they marched to the 2022 polls. The decision of governments not to honour their debts is almost always a political one, with the 1980s Latin American debt crisis providing a useful example of stretched budgets and intense voter pressure driving 16 countries in the region to restructure their loans. The economic and especially political parallels in Africa are limited, but the evolution of this debate should remain a long-term watchpoint as debt service obligations mount.

Concerns over debt costs have also reached multilateral forums. In April 2023, Africa’s finance ministers called for an overhaul of global lending architecture – a demand amplified by figures such as Kenya’s President William Ruto. These leaders propose sweeping organisational changes to development financiers like the World Bank, reforms to credit rating agencies, as well as streamlined and fairer debt restructuring processes. Demands around the latter will only intensify as countries such as Zambia, Ethiopia, and Ghana remain on the receiving end of delays caused by great powers’ politicisation of debt relief initiatives – most notably the G20 Common Framework.

Taxpayers to foot the bill

Limited fiscal headroom will drive governments to pursue more aggressive policies aimed at bolstering tax revenue. The latest round of Eurobond issuances will have bought government’s breathing room. Both Kenya and Côte d’Ivoire used the proceeds to retire outstanding debt, allaying concerns over near-term repayments, but careful fiscal management must remain a priority as loans mature over the medium- to long-term. This backdrop will see multilateral lenders like the IMF playing a larger role as providers of cheap finance, though policy conditionalities around this borrowing remain important for businesses to monitor.

Many African governments have turned their attention to revenue-raising measures, partly to reduce their reliance on expensive lending in domestic and international markets, but also to meet targets set under arrangements with the IMF as in the case of Tanzania and Côte d’Ivoire. Local individuals and businesses will likely bear the brunt of higher tax burdens or heavier enforcement, however political considerations may make it easier for governments to target foreign players. This is especially true in resource-rich countries where international firms find it difficult to pull out and where politics around the extractive industry is most potent. Zambia’s experience under the Patriotic Front government is illustrative, with sudden changes to the mining regime and its enforcement effectively leading to a freeze in new investment. Firms can minimise this risk by ensuring full compliance with local requirements and collaborating with governments to ensure international best practices are embedded in licensing agreements.

Private sector has a developmental role to play

Governments and businesses would both benefit from wider adoption of workable public-private partnerships (PPPs) and concession agreements, helping drive development agendas while also preserving fiscal space. Since November, China Civil Engineering Construction Corp. has been negotiating a concession agreement and USD 1 billion investment plan for the iconic TAZARA railway connecting Tanzania and Zambia. But as Beijing’s Belt and Road Initiative dials down the size of its project pipeline, the opportunity for other actors to step in will grow. For example, in November, Dakar Mobilité secured EUR 135 million to finance the rollout of Senegal’s electric bus network in Dakar. French firm Meridiam and the Senegalese sovereign wealth fund jointly own and operate Dakar Mobilité, the revenues from which are expected to repay components of the financial package.

Arrangements such as these are more likely to insulate private sector actors from aggressive tax proposals or specific targeting by cash-strapped governments. If effectively implemented, they will also play an essential developmental role in the communities in which they operate – through the project itself and economic spillovers in terms of local employment and content. However, navigating the political environments around such investments can be complex, underscoring the value of strategic advisory from partners who can connect the dots and translate political developments into actionable insights.

Acknowledgments

We would like to thank Connor Vasey for providing insights and expertise that greatly assisted this research.

Africa Matters Ltd is an Africa-focused strategic advisory firm, delivering analysis, access, and impact. Since 1997, AML has supported companies, investors, governments, and development agencies to conduct business in Africa. From offices in London and Kampala, we promote sustainable and equitable investment across the continent. In May 2023, Africa Matters Ltd joined J.S. Held, a global consulting firm that provides technical, scientific, financial, and strategic expertise to organizations facing high stakes matters demanding urgent attention.

For further insights on investing in Africa, please email Managing Consultant Connor Vasey on [email protected] or Tiffany Wognaih on [email protected].

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This publication is for educational and general information purposes only. It may contain errors and is provided as is. It is not intended as specific advice, legal, or otherwise. Opinions and views are not necessarily those of J.S. Held or its affiliates and it should not be presumed that J.S. Held subscribes to any particular method, interpretation, or analysis merely because it appears in this publication. We disclaim any representation and/or warranty regarding the accuracy, timeliness, quality, or applicability of any of the contents. You should not act, or fail to act, in reliance on this publication and we disclaim all liability in respect to such actions or failure to act. We assume no responsibility for information contained in this publication and disclaim all liability and damages in respect to such information. This publication is not a substitute for competent legal advice. The content herein may be updated or otherwise modified without notice.

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