Next Africa: Debt discrimination?

By Antony Sguazzin and Robert Brand

Next Africa, a weekly newsletter of where the continent stands now — and where it’s going next.

African leaders say the continent’s growth is held back by discrimination.

Its economies have attracted less investment than peers in Asia and Latin America and Africa has struggled to make its voice heard on international forums.

That bias stretches to the debt markets.

Nowhere is that starker than in the case of South Africa, an developing nation with deep and liquid capital markets and strong institutions.

South Africa has a similar BB- credit score at S&P Global Ratings to Brazil, but pays 5.48% for 10-year dollar-denominated debt compared with 4.63% for the South American nation. For local debt, the contrast is even starker: South Africa pays 9.31% for 10-year notes, compared with Brazil’s 6.75%.

Liquidity isn’t the issue and neither is political risk. Brazil impeached two presidents in recent years. Its current leader, Jair Bolsonaro, has drawn criticism for firing ministers on a whim and not doing enough to halt what’s become the world’s second-worst coronavirus epidemic. South Africa is stable by comparison.

For some other African nations, the situation is dire. Kenya, for example, pays 7.45% for 10-year dollar debt, compared with 6.48% for similarly-rated Bolivia. Ghana pays 8.78% compared with 7.51% for Ukraine, which has the same credit rating. 

Yes, Africa has had its problems in debt markets. Zambia and Angola are seeking to restructure their debt. Yet, none of them are serial defaulters like Argentina, which has reneged on debt obligations no less than nine times. 

Reasons that have been put forward are the small size of many African bond sales and a low rate of domestic savings.

But at a time when the coronavirus pandemic is boosting the need for stimulus, the often unwarranted risk premium is an unwelcome cost.

 “When you look at the risk premium put on African countries you just question, why?,” Ken Ofori-Atta, Ghana’s finance minister, said in an interview with Bloomberg Markets.