Africa Needs to Kick its Debt Habit

  • Four African countries have issued bonds totaling $10.7 billion in 2018

  • African countries could have trouble paying debts if interest rates go up

Ivory Coast, Ghana and South Africa are getting ready to issue bonds to investors in the U.S. and Europe. These countries follow Senegal, Nigeria, Egypt, and Kenya which have already issued bonds this year totalling $10.7 billion. Should the cycle of continuing to issue bonds be broken?

Why this matters: Excluding South Africa and Egypt, the African countries issuing these bonds are taking on new debt to pay off the old debt. They haven’t done the work to diversify their economies and increase tax revenues for long-term financial health. “Governments should be attentive and they should be cautious about not overloading the countries with too much debt,” IMF Managing Director Christine Lagarde warned in 2014.

Since that time, several countries including Ghana, Zambia, Nigeria and Mozambique have found themselves in situations where they’ve had to pursue emergency financial relief. At the end of 2017, Lagarde’s warning remained the same, “ There are countries in Africa—I’m not going to point fingers at any of them—but some of them are seriously at risk.”

Situational Awareness: The U.S. economy has been performing well and typically in this environment, the Federal Reserve raises interest rates. This will cause African bonds to trade at a lower value subsequently increasing costs for governments to pay down their debt. Look out to see if the Federal Reserve raises interest rates during its next two-day meeting March 20-21.

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