Just a little while
ago (last July), they were so hopeful when adopting the Addis Ababa Action Agenda of the Third
International Conference on Financing for Development (FfD3):
“We, the Heads of State and Government and High Representatives,
gathered in Addis Ababa from 13 to 16 July 2015, affirm our strong political
commitment to address the challenge of financing and creating an enabling
environment at all levels for sustainable development in the spirit of global
partnership and solidarity. We reaffirm and build on the 2002 Monterrey
Consensus and the 2008 Doha Declaration.”
… and so on… The SDG tanker had been set on course, and
little attention seems to have been given to the slowdown in most large emerging
economies (EM) nor to the risk that ample liquidity driven by OECD monetary
policy will not last forever. Poor countries´ challenging economic backdrop
dominated by falling commodity prices, lower demand from China and the
prospects of the Fed eventually hiking rates, all that was largely ignored in
the official FfD3 documents
But consider the prospects of
mobilizing foreign and domestic resources in Africa, which has become
increasingly China centric over the last 15 years. According to the IMF latest
(October 2015) Regional Economic Outlook on Sub-Saharan Africa, aptly subtitled
“Dealing with the Gathering Clouds”, Africa´s recent good macro
performance has rested on three pillars: high commodity prices; associated
capital inflows; and better policies and institutions. Wasn´t the Fund
consulted during the FfD process? Or was it simply ignored?
Figure 1:
Commodity Prices August 2015, 2016 Projections
% change
since January 2013
The first pillar, commodity prices, has broken over
the last three years (Figure 1). Sub-Saharan Africa counts 8 net oil exporters
and 15 net nonrenewable exporters. The prices of their main export staple -
fossil fuels and metals - have crashed by between more than 60 and 30 percent
during that period. Oil exporters are hard hit: If oil exports constitute 40
percent of a country´s GDP, an annual drop in oil prices by 25 percent
translates into an income effect of minus ten percent. To be sure, commodity
prices may fall even further; they may stagnate from now on; and they may rise
again. Only the rise of commodity prices would alleviate African producers.
Don´t bet on it, says Carmen Reinhard (2015)[1]:
price declines typically retain downward momentum. By the end of the boom, many
commodity exporters had already initiated investment projects to expand
production. As these investments bear fruit, the increased supply will sustain
downward pressure on prices. For minerals, short-term supply is
price-inelastic: a result of near-insurmountable barriers to exit and a
significant proportion of fixed costs.
The second pillar,
net capital inflows, is so far
surprisingly unaffected prima facie.
The IMF WEO, released last October, still projects a small surplus (0.4% of
GDP) in the capital account for Sub-Saharan Africa. DB Research[2]
produces fresh evidence that Eurobond issuance by Sub-Saharan African frontier
sovereigns (excluding South Africa) has held up remarkably well in 2015.
Figure 2:
Change in Debt Service Cost, Sub-Saharan Africa 2015
However, issuers had
to offer significantly higher yields than previously and yields on secondary
markets jumped to multi-year highs (Figure 2):
·
While
Emerging Market Bond Index Global (EMBIG)
spreads have moved up since October 2014 by less than 100 basis points (bp), sub-Saharan
sovereign bond spreads have risen by between 120 bp (South Africa) and almost
500 bp in Zambia.
·
As
all outstanding sovereign Eurobonds in SSA are denominated in USD, any
depreciation will have a direct effect on the local currency value of debt
service payments. This is potentially even more harmful for interest burdens
than rising spreads. The drop since summer 2014 against the USD has been most
severe for the Zambian kwacha, the Angolan kwanza, the Namibian dollar, the
Ugandan shilling and the Tanzanian shilling which lost between 51% and 20% yoy
against the USD, as of November 2015. Zambia has been hit hardest: debt service
cost rose in 2015 by 18 percentage points of GDP (left hand scale in Fig. 2)
and by 106% in local currency terms (right hand scale).
The difference
between rising local currency cost of Eurobonds – around 20% on average in SSA -
and the drop in growth rates to low single digits makes for terrible debt
dynamics, which is unlikely to be compensated by a corresponding surplus in the
non-interest account.[3]
[1] Reinhard, Carmen (2015), “The
Commodity Roller Coaster”, Project Syndicate,
9 November.
[2] Masetti, Oliver (2015), „African
Eurobonds: Will the Boom Continue?“, Deutsche Bank Research, Research Briefing,
16th November, Frankfurt/Main.
[3] Debt dynamics for a country´s local
currency debt-GDP ratio eD/Y are driven by e(r-n)D + (G-T), with e the real
exchange rate, r real interest cost, n real growth rate, D/Y the debt-GDP ratio
and (G-T) the non-interest deficit. The same debt-dynamics equation can be
applied to public finance.
