IFI governance


Recurring debt crises in sub-Saharan Africa and the rise of bond issuance

7 October 2016

7 October 2016 | Minutes


  • Mark Flanagan, Assistant Director, International Monetary Fund (IMF)
  • Tirivangani Mutazu, Senior Policy Analyst, The African Forum and Network on Debt and Development (AFRODAD)
  • Jose Oyola: Ph.D, CPA
  • Richard Kozul-Wright, UNCTAD
  • Ingrid Harvold Kvangraven, Report author, PhD Student in Economics at The New School

Ingrid Harvold Kvangraven

  • 20% of Norwegian investments are in bonds
  • This year request was made from parliament for guidelines on this investment
  • Context
    • Private investment growing significantly in Sub Saharan Africa though looking over recent decades remains marked by volatility
    • Challenges related to falling commodity prices
    • As a region, SSA is current account deficit
    • Since 200, external debt has fallen heavily – post HPIC and subsequent growth period
    • 2006 first time for decades that a SSA (ex S Africa) issued a bond, now 14 states have done so
    • no international law regulates these kinds of flows – UNCTAD principles exist but are not binding, also Bank/Fund Debt Sustainability Framework
    • Historically long period of historically low interest rates in advanced economies driving investors toward emerging markets searching for higher yields
  • €25 billion in Eurobonds issued by SSA states
    • no strings attached, provided benchmark for the private sector
    • relatively cheap (to domestic debt) but also relatively expensive compared to concessional rates
    • also benefitting from demand for finance (the deficits the state are running
    • Poses exchange rate risk, (Nigeria, Zambia, Ghana case studies in the new report, linked to commodity price falls)
    • Interest rate risk – usually issue bonds at fixed rate (95% issued at fixed rates) so minor
    • Legal risk is predominant for those who issue bonds without collective action clauses – e.g. Nigeria – despite Argentina case
    • Risk of excessive debt accumulation – some states have turned to IF
    • Fungibility – other side to ‘no strings’ is lack of accountability potentially about funds’ use
  • Nigeria case
    • CSOs complain of lack of information regarding loan contacts and cannot give input, despite fiscal responsibility act of 2004
    • Parliament lacks access to the loan information
    • Debt to GDP ratio is low but fast rising, while debt servicing remains a high proportion of government revenue (currently 30% and may rise much higher) posing a problem to debt servicing potentially
  • Recommendations
    • Implement ethical guidelines for the investment in sovereign bonds – e.g. UNCTAD principles to be treated as minimum standard
    • Transparency is important, as is input from variety of stakeholders
    • International community should enhance and improve level of objectively of information regarding a country’s economic situation and outlook, not just in the DSF of Bank/Fund, but also role of rating agencies which are often highly pro-cyclical
    • Ultimately an independent international debt restructuring mechanism

Mark Flanagan

  • Paper’s analysis of changing financial landscape is valid and corresponds to what we see
  • Especially worrisome is steady increase in commercial borrowing in ‘frontier economies’ (especially commodity exporters vulnerable to price fluctuations)
  • Paper’s points about Eurobonds benefits & risks were valid.
    • Additional points include benefits of diversified sources of finance can at times offer better risk-adjusted return options for debt issuance
    • On downside, once a state becomes more dependent on market financing it becomes more vulnerable to contagion
    • Fungibility issue – of course governments need to be accountable fro the whole of the budget, not just bonds
  • Need to draw distinction between DSF & macro frameworks when looking at debt related problems – like over-optimistic forecasts 0 are inherent to the macro framework
  • Markets can shift sentiment very quickly – once a risk premium rises that can contribute to a bad equilibrium outcome that is self-fulfilling
  • Bank-corporate linkages will follow once a government begins to borrow externally as it is a contingent liability for the government
  • When dealing with economies with few bonds outstanding the lack of many instruments can be helpful, but has to be supported by building capacity in debt management offices due to the continuous and sizeable scale of the task
  • Smooth and regular issuance program requires very careful cash management – as investors examine this as a sign of how well rollover is managed and it is important to the risk premium
  • Currently market access country DSA is not sufficiently up to date for this new context, including looking also at debt service thresholds especially due to volatility
  • We are also looking at technical assistance for debt issuance and management of it, including organisation and management
  • Under our debt limits policy, we are supposed to now have teams present what a countries’’ borrowing plans are, and that a well-developed view on access to markets is present
  • When a country is affected by contagion – then financing is necessary
    When a country suffers a permanent shock, like long-term commodity price falls – then we need to find a smooth way to support adjustment

Richard Kozul Wright

  • Appreciate CSOs’ support to UNCTAD principles
  • UNCTAD’s concerns include emergence and management of debt in emerging economies
    • IMF’s recent headline figure was an indication of that concern – thought he large figure mixes many types of debt
  • Recent trade and development report of UNCTAD signaled our concern over health of global economy and the danger we see of falling commodity prices, exiting capital, collapsing exchange rates, slow growth of output and world trade is a potentially perfect storm for many emerging economies which will manifest via sovereign debt crises, though it may not begin there
  • Concern for example over vulnerability of corporates’ borrowing in emerging markets – and if history is any guide corporate debt crises quickly become sovereign debt crises
  • The larger macro context of this discussion is worrying
  • The issues flagged in the report in Africa valuable flags of key trends, though I would also flag structural challenges
    • We worry that the entry of African states into capital markets may have had less to do with their fundamentals improving in terms of productivity for example, or premature de-industrialization, rather than changes in global capital markets
    • Also problematic is use of FDI to gauge these pressures – sadly many African policy makers often feel that FDI is new plant, new equipment, but often that is not the case
    • Hence we need to align analysis of the structural and the financial
    • Important issues need to be raised about rating agencies – a recent World Bank meeting ‘Borrow without Sorrow’ showed that ratings agencies are oblivious to their own limitations. We’ve analysed their role and see their work being heavily influenced by ideological or political factors than technical analysis
  • We do not believe appropriate structures are in place to support this context, and we support the work IMF is doing though UNCTAD believes that principles and soft law approaches could help if introduced in national legislation (e.g. vulture fund legislation in Belgium or UK), but in turn these are not necessarily sufficient for several contexts.
    Hence UNCTAD has always sought some kind of international framework for sovereign restructuring – even if not a dramatic institutional change – the discussion is required
  • Note that next year the lead of the G77, Ecuador, has sought to pick up the issue of debt resolution at future UN general assembly

Tirivangani Mutazu

  • Some key points to emphasise:
  • The €25 of bond issuance is a significant issue
  • For us the key question is usage of the funds that have been borrowed
  • We ask whether the money has been used in productive sectors
  • There remain huge gaps that need to be filled in terms of debt management – we know the IMF is doing a lot of work but challenges remain, including high staff turnover
  • We also wish to see the discipline of regulatory filings and transparency – and use of collective action clauses
  • We also need a strong legal and regulatory framework at the national level, e.g. legal frameworks that also guide our countries in terms of how they should issue bonds in terms of their processes
  • We face significant financial risks that could lead to financial crises returning to many cases.
  • This is why there is such importance of competent public debt management
  • This report’s value is to us and other African civil society organisations to ensure the continent does not return to debt crises or other debt related growth challenges
  • There is also a responsibility that investors should consider, they should not fund or invest in countries where the funds are not used productively or not in the interests of the public or citizens

Jose Oyola

  • Auditor’s perspective is to find out what went wrong when it is too late
  • Our experience in the US is the lesson that as long as markets offer finance then borrowing will occur and behavior is not changed
  • What is needed is transparency
  • This can come in different forms – the best way to provide transparency is to publish any debt-incurring proposals so that any agency or public body can know what is coming – it is key to changing behavior that transparency occurs before, not after the event
  • The IMF has an important role in encouraging such transparency
  • The terms and conditions of debt contracts are crucial
  • As debt auditors, we have lessons to learn from the Chinese practices – in particular the work they did in examining local debt in China.
  • The Chinese audit agency sits in the executive committee – a model not followed elsewhere – sitting alongside those who take decisions on debt issuance