Africa's Hard-won market access

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African governments have long lists of investment ideas essential for improving living standards but face financing shortfalls from taxes, foreign and domestic investment, and foreign aid.
To boost development, some African countries have chosen to borrow on global capital markets, especially via eurobonds (foreign currency bonds issued in global financial centres).
Between 2007 and 2020, twenty-one African countries accessed international debt markets, many for the first time.
The stock of African eurobonds reached $140 billion in 2021.
The bulk of issuance has been by larger emerging economies: Egypt, South Africa, and Nigeria; issuance relative to economy size has been sizeable in Ghana, Zambia, Senegal, Gabon, Ivory Coast and Angola.
Most market-accessing African countries have repaid bonds in full at maturity or bought them back ahead of time; Mozambique and Seychelles have restructured eurobonds; Zambia halted the repayment of its eurobonds in 2020 and is in the process of solving its debt puzzle.
There are 55 African countries with diverse debt situations.

Eurobonds provided a means of quickly raising a decent scale of financing that governments could invest freely, without the policy conditions typical of official lenders.
Choices on currency, tenor, and repayment schedule empowered debt management offices in ways concessional lending did not.
Sovereign eurobonds serve as a benchmark of country risk and can attract other capital flows to the private sector.
Eurobond issuance has coincided with greater coverage of African economies in global financial media.
Eurobonds are transparent: terms and conditions are published by the exchanges the bonds are listed on.
Longer-dated bonds of thirty years or more have been issued; countries are issuing in Euro as well as US dollars.
Increased bonds have meant African countries have increased their weight in the main emerging market bond indices.

Eurobonds and market borrowing can be expensive; costs reflect investors’ judgments on bond quality and sovereign fundamentals (economic, political, social, and climate risks) and prevailing market factors.
Market sentiment can shift quickly; countries can be shut out during global risk aversion (e.g., early 2020 when the pandemic tipped the global economy into recession).
Volatility, foreign currency risk, and high borrowing cost make eurobond borrowing hazardous for many countries.
Many economies remain too small for the minimum scale of lending markets require or lack foreign exchange earnings to service non-concessional borrowing.
While African debt levels in US dollar terms are small compared with other parts of the world, the composition of debt and reliance on foreign-currency borrowing are causes for concern.
General concerns about rising debt levels became more audible in 2019; uncertainty remains about how much medium-term debt sustainability has been eroded following the pandemic shocks of 2020 and 2021.
Buffers have been eroded and another subsequent crisis would be harder to fight without efforts to reduce debt risk and shift to better borrowing practices.

Finance ministries sought credit ratings and equipped debt management offices to manage new borrowing types.
Shift to more active debt management observed: repayments in full at maturity, buybacks ahead of time, and use of lower borrowing costs to manage spikes in repayment schedules.
Some debt slips have occurred: restructurings (Mozambique, Seychelles) and halted repayments (Zambia in 2020).

Tighten use of proceeds:
- Put money raised from bonds and loans to better use through systems for managing public investment: prioritised lists of projects, tools for better project design, improved procurement.
- Maintain a public database with full project information.
Build a sustainable brand:
- Convincingly set out environmental, social, and governance credentials to attract more and better capital (bond markets, direct investment, private equity, portfolio flows, or official sector support).
Increase flexibility in bond contracts:
- Adopt simple contract tweaks allowing governments to repay bonds or push forward maturities in times of trouble.
- Favor practical solutions over academically promising but impractical fixes (example cited: GDP-linked bonds seen as not a practical fix).
Provide parachutes:
- Until bond contracts are more flexible, make instruments available to help countries forced to issue in very bad markets.
- Use credit enhancements, such as full or partial guarantees of a sovereign’s loans or bonds, to deal with liquidity problems.
Prepare a rescue plan:
- Develop a new scheme ready in the event of a shock that initiates a systemic debt crisis, reflecting how the debt landscape changed over the past decade.
- Ensure private creditors participate alongside official creditors from the outset.
- Provide a menu of options allowing countries in distress to select those best suited to their problems.

Market access should be celebrated as an opportunity to boost growth and development and help achieve the Sustainable Development Goals if private capital can be mobilized, but policymakers must remain clear-eyed about risks.
The metaphor: many frontier countries have been "driving too fast in the wrong sort of vehicle"; eurobonds and market access should remain part of financing mixes, but a more robust form of transport is needed to complete the journey intact.

Source: F&D Magazine — Africa's Hard-won market access