Africa’s bond walls and ballot trains

A year of reckoning approaches, with 20 elections and a wall of over 10 bond redemptions due in 2024.

Published on 03 July 2023 in ISS Today

By

Menzi Ndhlovu
Signal Risk Senior Country and Political Risk Analyst

Ronak Gopaldas
ISS Consultant and Signal Risk Director

Since COVID-19, African economies have muddled through a series of internal and external shocks. While some moved swiftly to arrest the rut, others have done little to avert the corrosion of internal and external balances. Despite recent market improvements, the prospects of disorderly defaults and messy elections continue to linger for investors.

African policymakers are partly to blame. Macroeconomic fundamentals have been weakened by bond splurges at the end of the financial and oil crises, failure to diversify and solidify growth bases, complacency due to a benign interest rate environment, and fiscal ill-discipline for the sake of political expedience.

That said, the continent’s plight has been compounded by exogenous circumstances it’s had little control over. In 2020 Africa saw its worst growth in 25 years, says the United Nations Economic Commission for Africa. It suffered the triple blow of capital flight, commodity price declines and COVID-19 effects. Just as market conditions started improving later in 2021, prospects were punctured by Russia’s invasion of Ukraine, which triggered a wave of risk aversion.

External shocks were again the dominant theme in 2022. Rising United States (US) interest rates, Europe’s energy crisis and China’s zero-COVID-19 policy saw fears of stagnation dominate financial markets. A strong dollar, the continuation of the interest hiking path, and banking failures in the US and Switzerland in 2023 compounded financing constraints, with funding costs climbing significantly. Correspondingly, emerging market yields have skyrocketed, and currencies weakened at a time when a host of maturities are fast approaching.

Policy dilemmas have also left Africa with few levers to satisfy market and welfare demands. Central banks face trade-offs between inflation, currency stability and growth, with risks of both under and overtightening. On the fiscal front, austerity is unpalatable given the ensuing cost of living crises. Yet markets will punish any signs of profligacy. This has left few avenues for recourse as governments balance growth, stability, welfare and financial obligations at a time when many need to win elections or consolidate majorities.

Policy dilemmas have left Africa with few levers to satisfy both the market and welfare demands

Already, Zambia and Ethiopia have folded, opting for debt restructuring under the G20’s common framework. Both faced upcoming maturities but were hamstrung by thin internal and external buffers, market aversion and limited financing options. Tellingly, both appeals occurred shortly before the two countries’ general elections, making any last-gasp austerity unviable. Ghana followed suit, in circumstances strikingly similar to Ethiopia and Zambia.

Yet, these countries’ experience has shown that even a multilateral framework backed by the International Monetary Fund (IMF) and World Bank isn’t a silver bullet. In the two years since discussions began, Zambia and Ethiopia’s debt restructuring processes have been slow, weighed down by conflicting interests.

Unlike the common framework’s predecessor – the Heavily Indebted Poor Countries initiative – stakeholders have had to factor in private creditors and navigate a more adversarial geopolitical environment. This has seen China being reticent against Western-dominated institutions.

Although Zambia’s restructuring process is finally turning the corner, it took two years to get here – reinforcing the complexity of such procedures. These often leave countries in economic purgatory with uncertainty over balances, financing capabilities and sovereign risk.

With many bond redemptions and ballots coming next year, several African sovereigns could go the way of Zambia and Ethiopia, with or without the common framework. Tunisia is arguably at highest risk. President Kais Saied’s embattled administration goes to the polls in 2024 at the precipice of a political and economic crisis. Saied’s political capital has been at risk since a 2021 purge of his government, a controversial constitutional amendment in 2022, boycotted elections and racist dog-whistling.

Although Zambia’s restructuring process is finally turning the corner, it took two years to get here

He also hasn’t delivered on reforms demanded by the IMF, ratings agencies and the market. Consequently, the IMF has withheld a US$2.5 billion loan, while Fitch downgraded the country to CCC-. This further constrains its financing options ahead of a €500 million maturity in October this year, an €850 million maturity in February 2024, and a series of amortisations in short intervals thereafter. With electoral considerations seemingly at odds with economic requirements, Tunisia may be facing a default.

Senegal also finds itself wedged between a bond wall and a ballot train. West Africa’s bastion of stability has been shaken by violent unrest, with opposition leader Ousmane Sonko’s supporters claiming he’s being persecuted by President Macky Sall to clear the path for an unconstitutional third term. This portends a volatile period ahead of the 2024 elections and a US$200 million bond redemption next July. Although Senegal’s risk of default is lower than Tunisia’s, financing constraints will be elevated amid political uncertainty.

Do African policymakers have the will and capacity to navigate the Catch-22 of servicing both political and market imperatives?

There are some glimmers of hope. Some African states in the red are prudently seeking (or have acquired) IMF bailouts well ahead of impending maturities, allowing for reforms to be instituted and buffers built ahead of sensitive political periods. Some have even mulled buybacks and sinking funds to insulate against longer-term risk.

Nigeria and Kenya have shown that rapid turnarounds in economic policy are possible

The IMF, meanwhile, has taken a softer stance on reform requirements, especially when they threaten political stability. And Europe is mulling over lifelines for geostrategic states like Tunisia.

Market conditions are also improving. Softer inflationary data from developed countries point to an easing of global monetary tightening. Meanwhile, bond indexes suggest that aversion towards emerging markets is cooling from the lows of the first quarter.

This is no doubt influenced by the recent trajectory of continental hegemons such as Nigeria and Kenya. They have shown that rapid turnarounds in economic policy are possible and that the spectre of populist backlash isn’t as overwhelming if political capital is leveraged, and the public is sensitised to the need for prudence. Cognisant of this window of opportunity, Kenya is already lining up fresh Eurobond issues, while investors swept up Nigerian government bonds on 19 June.

African policymakers should take advantage of improving market conditions as they navigate the bond wall and ballot train awaiting them in 2024. But they should do so knowing that any profligacy could see economic prospects derailed in a global context where uncertainty remains rife.

Menzi Ndhlovu, Senior Country Risk and Political Risk Analyst, Signal Risk and Ronak Gopaldas, ISS Consultant, Director at Signal Risk

Image: © International Monetary Fund (IMF)

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