Increasing African Sovereign Debt: Implications for the growth and stability of the financial system Dr. Vera Songwe, UN Economic Commission for Africa @SongweVera Date: 31 July 2019 Kigali, Rwanda

A decade to 2030 – Are we on track? African Sovereign Debt www.uneca.org

The current level of revenue is below what is required to achieve the Sustainable Development Goals (SDGs). To meet the SDGs: Incremental financing needs estimated at between $614 billion and $638 billion per year. while incremental spending needs for low-income countries and lower middle-income countries are estimated at $1.2 trillion per year. This translates into an estimated 11 per cent of GDP between 2015 and 2030. African Sovereign Debt www.uneca.org

The ECA Economic Report on Africa Identifies 5 key sources of revenue that could lower the financing gap African Sovereign Debt www.uneca.org

Debt sustainability is important for ensuring achievement of the SDGs Nevertheless, increase in revenue alone is not a sufficient source of financing Debt sustainability is important for ensuring achievement of the SDGs Revenue leakages to pay off debt could be diverted from spending on the SDGs. High debt levels, and therefore unstable macro economies could unravel development gains, pushing back the vulnerable in society into poverty. African Sovereign Debt www.uneca.org

Sustainable Debt: factors that increase the magnitude of the flow of debt African Sovereign Debt www.uneca.org

Debt to GDP ratios growing… Debt levels in more than half the African countries (30 countries) have risen precariously beyond the IMF recommended 40 percent ceiling Debt to GDP ratio for developing and emerging economies. The number of countries with debt ratios of more than 75% of GDP has more than doubled - 2010 (3 countries); 2018 (11 countries) Sudan (163.2); Eritrea (129.4); Cape Verde (127.7); Mozambique (100.4); Congo (98.5); Egypt (92.6) The increase has also occurred in the number of countries with debt to GDP ratios of 50%-60% (3 countries in 2012 to 10 countries in 2018) and 60%-75% (1 country in 2012 to 8 countries in 2018) The number of countries whose public debt is less than half of GDP has declined: 43 countries in 2012 to 22 countries in 2018 African Sovereign Debt www.uneca.org

African Monetary Cooperation Program (AMCP) = 65% of GDP Any Debt Threshold? IMF = 55% of GDP 24 African countries African Monetary Cooperation Program (AMCP) = 65% of GDP 19 African countries When do you say that the country has a high level of debt? - Persistent rise in debt lowers growth - Threshold effects are mostly country specific - The level of debt that is harmful for an economy could be different for another depending on the economic and political conditions of the economy. African Sovereign Debt www.uneca.org

Africa’s debt has taken an upward trend in recent years, growing at a faster rate. Debt grew at -9.4 per cent African Sovereign Debt www.uneca.org

On average, interest rates have been higher than GDP growth in Africa, indicating a rising debt burden African Sovereign Debt www.uneca.org

Widening fiscal deficit is correlated to faster growth of debt (2008 – 2018) The analysis uses data from 2008: Before 2008 there was HIPC debt forgiveness which may bias the correlation between fiscal deficit and debt. African Sovereign Debt www.uneca.org

The countries with the highest fiscal deficits, had the fastest rate of growth in debt African Sovereign Debt www.uneca.org

Similarly, an increase in the current account deficit is correlated to faster growth of debt (2008 – 2018) African Sovereign Debt www.uneca.org

Ethiopia’s imports have tripled compared to exports, leading to a widening of the current account African Sovereign Debt www.uneca.org

Consequently, the pace of growth in debt picked up African Sovereign Debt www.uneca.org

Growth rate of debt is faster at lower interest rates: External rates have been low since 2008. African Sovereign Debt www.uneca.org

There has been a steady rise in the amount of Eurobonds issued in Africa since 2009 African Sovereign Debt www.uneca.org

High infrastructure financing needs remain… Infrastructure Financing Commitments in 2012-2017 and Financing Needs in 2018 ($bn) 2012 2013 2014 2015 2016 2017 2018 Transport 30.06 37.26 34.24 32.36 26.24 34.04 47 Water 11.53 11.20 9.38 7.54 12.22 13.18 66 Energy 28.18 28.60 24.06 33.52 20.62 25.78 50 ICT 1.30 1.91 2.39 2.38 1.66 2.27 7 Multi-sector 2.97 2.26 2.61 2.15 2.77 5.13 3 Other/unallocated 1.07 2.03 2.74 0.97 3.39 2.17 2 Total 75.11 83.26 75.42 78.92 66.90 81.57 175 Source: ICA, 2017 and AfDB, 2018 African Sovereign Debt www.uneca.org

Rising debt servicing costs… Debt and debt service ratios have been increasing. While external debt stock and debt service have not reached the pre HIPC and MDRI levels, they are greater than they were when MDRI began to operate in 2006 External debt service peaked at US$46 billion in 2006 before falling to US$27billion in 2010. It has since then doubled to 54 billion in 2017. African Sovereign Debt www.uneca.org

Country examples …… www.uneca.org African Sovereign Debt The increase in debt has also resulted in increase in debt service for all 6 countries. Debt service percent of exports has more than doubled over the past five years for Cameroon and Zambia. Cameroon from 3% in 2013 to 11% in 2017 Zambia from 3% in 2013 to 18% in 2017 Djibouti from 8% in 2013 to 11% in 2017 Uganda from 2% in 2013 to a high of 17% in 2016 African Sovereign Debt www.uneca.org

Official Exchange rate risk… Official exchange rates trend in selected countries with high risk of debt distress. The exchange rate trajectory accelerated since the 2008, following the debt accumulation. African Sovereign Debt www.uneca.org

Impact of rising public debt on sustainable growth and financial stability African Sovereign Debt www.uneca.org

Negative link between increasing public debt and sustainable growth - The impact of increasing public debt of African countries on sustainable growth is negative. African Sovereign Debt www.uneca.org

Negative link between increasing public debt and sustainable growth Crowding-out private investment Rising cost of borrowing lower investment higher public deficit High future taxes – negative intergenerational transfers Future inability of the government to spend on development expenditure Currency or banking crisis - Debt repayment could hinder future ability of government to spend on development expenditure African Sovereign Debt www.uneca.org

Reserves to external debt declining… Total Reserves to external debt stocks ratio have also deteriorated. Cameroon from 67% in 2013 to 31% in 2017 Djibouti from 51% in 2013 to 27% in 2017 Ethiopia from 19% in 2013 to 11% in 2017 Rwanda from 56% in 2013 to 27% in 2017 Uganda from 39% in 2013 to 33% in 2017 Zambia from 42% in 2013 to 13% in 2017 African Sovereign Debt www.uneca.org

Risk of foreign currency borrowing vs Risk of foreign currency borrowing vs. Benefits of local currency borrowing Challenges / Risks Opportunities / Benefits Increase in debt servicing costs and refinancing risk Foreign exchange exposures Vulnerability to external shocks Short-term commercial debts and upward interest rates Lack of depth of local capital markets Poor debt management strategies and capacity Promote development of domestic bond markets Crowding-in local private sector (institutional investors, banks and retail investors) Lower precautionary reserve holdings Diversified creditor and investor base High yields coupled with lower servicing costs African Sovereign Debt www.uneca.org

Growing Local Currency Debt Markets An opportunity to raise corporate debt and reduce burden from bank financing. Nigeria – Naija bonds – 12 billion Nigerian naira denominated bond ($76m) issued in 2013 and 100% locally subscribed. Rwanda – Umuganda and Twigire bonds –Rwandan franc bond worth $22m issued in 2013 at 12.25% yield. Indonesia – Komodo bonds – 4 trillion Indonesian rupiah ($298m) bond issuance oversubscribed four times in 2017. - Local currency bond issuances fit with countries’ goals to deepen local capital markets and close their development financing gaps. African Sovereign Debt www.uneca.org

Policy Response Increase borrowing in local currency in both domestic and international markets to lower exposure and exchange risks. Update and adapt debt management frameworks and strategies to new debt structures, macroeconomic uncertainty and global market risks – e.g. State-Contingent Debt Instruments (SCDIs) More innovative financing mechanisms (e.g. blended finance, PPPs and other risk mitigation mechanisms) to crowd-in private sector investment. Rebalance fiscal policy to maintain government spending while increasing revenue to reduce fiscal deficits without austerity. Finance deficits in local currency markets by issuing financial obligations with the longest possible maturity Local currency denominated debt has the advantage that it is hedged by government assets and income in that same currency in contrast to government assets in foreign currency which consists largely of their foreign currency reserves. African Sovereign Debt www.uneca.org

THANK YOU! www.uneca.org