7 August 2023
Africa has underperformed economically for a long time. Per capita GDP has risen less than 1% annually during the past 30 years (chart below); lagging all other emerging market regions during this period (although Latam has also slowed in the past decade). During this interval, meanwhile, output per person in the advanced economies has expanded nearly 1.5% annually; indicating that the gap between rich and poor has widened. It’s worth noting, however, that commodity-dependent Africa performed better between 2000 and 2010 when prices were high (although still trailing other EM areas). Unfortunately, this relative success has receded in the period since the Global Financial Crisis (GFC).
More recently, global risks have added to Africa’s long-term challenges: Covid, the Ukraine war, worldwide inflation, and rising international and local interest rates. In particular, the burden of servicing its debt has raised the prospect of a widespread debt crisis in the region. Indeed, Ghana and Zambia already have stopped serving their external debt, and Chad, Malawi, and Ethiopia have sought relief within the World Bank’s Common Restructuring Framework. Furthermore, the IMF has determined that 37 African nations are now experiencing high/moderate debt distress.
What’s particularly alarming is that this is occurring while global financial flows into the region are drying up. Indeed, overseas aid (ODA), loans from China (an important source of funds recently), and financial market borrowing have all collapsed in recent years (Chart above). Can a widespread African debt crisis be averted? Africa has enormous economic potential: a rapidly-growing population, in-demand natural resources, etc. However, unless international and domestic resources are mobilised quickly, the region may confront a period of fiscal austerity; both prolonging the area’s chronic underperformance and impeding its ability to respond to additional long-term challenges, e.g. climate change and the need for massive job creation. Who’s most vulnerable? Implications for global economy and financial markets?
Africa: One Size Doesn’t Fit All
In assessing the potential fallout from an African debt crisis, as well identifying possible the future growth opportunities the continent holds, it’s worth making a few initial observations. First of all, Africa’s scale is immense; indeed, the region’s population is nearly 5 times that of the USA. However, the area’s economic power is highly concentrated: the 8 largest economies account for roughly 70% of the region’s GDP (Nigeria, South Africa, Morocco, Algeria, Angola, Ethiopia, and Kenya).
Likewise, the 12 most populous nations represent over 60% of the area’s population (the aforementioned 8, plus Tanzania, Sudan, Uganda, and the Democratic Republic of Congo). And, the region’s prosperity is high unequal: GDP per capita in the ten wealthiest countries is 13 times greater than the poorest 10 nations (excluding tourism-based island economies) . In the USA, by contrast, income per head in the 5 most affluent states is only twice that in the poorest 5 states.
Likewise, economic performance within Africa varies widely (I am indebted to Mckinsey’s Global Institute for introducing the following framework). To be sure, GDP growth in most African nations has slowed since 2015 compared to the prior decade. However, several countries have not only decelerated, but have consistently underperformed the continent’s overall growth rate. These include Northern African nations, Namibia, Zimbabwe, Congo, Chad, Gabon, Burundi, Central African Republic, and South Africa (Chart above). Most of these rely heavily on oil or other extractive industries whose prices declined. Equally worrying, Nigeria, Angola, Zambia, and Sierra Leone have shifted from outperformers to laggards following policy mistakes and lower commodity quotes.
On the other hand, some nations have consistently outperformed the regional average during the past two decades, including Tanzania, Uganda, Rwanda, Ethiopia, Ghana, Malawi, Niger, Mozambique, DR of Congo, and Burkina Faso. Several of these countries have relatively more developed manufacturing capabilities; and are less impacted by commodity cycles. Encouragingly, another group has transitioned from underperformers to outperformers, including Ivory Coast, Cameroon, Kenya, Senegal, Somalia, Egypt, Mali, Guinea, Gambia, and Benin. Impressively, not only did these countries enjoy accelerating GDP growth, but they performed in line with the “consistent outperformers” during the most recent decade.
Africa Debt Crisis: Avoidable, But at a Price
The origins of Africa’s current debt problem is pretty straightforward. Like all nations, African governments spent lots of money in response to the Covid pandemic. Indeed, African public sector debt — both external and domestic — has risen sharply since 2019. Nevertheless, the region’s overall debt ratio remains lower than other EM and advanced economies (Chart above). The same is true for external debt (next Chart). Full-blown debt crises tend to occur when debt levels are extreme, and imbalance are large. In this regard, the IMF estimates Africa’s 2023 government budget and current account deficits to be roughly 4-5% and 2% respectively. Sizeable, but probably still manageable under normal market conditions.
Africa, therefore, does not appear insolvent. Rising global interest rates and heightened investor risk aversion, however, have created a liquidity crisis. As noted earlier, Africa has relied heavily on China to finance its current account deficit in recent years. After peaking at nearly $30-billion in 2016, loan inflows from China have virtually evaporated. Strategically, to be sure, China seeks to deepen its economic ties in Africa. However, China may be distracted by its domestic economic problems for now.
Similarly, several African nations took advantage of favourable financial market conditions to tap global bond markets. Following the outbreak of the Ukraine war, however, this source of financing has also dried up (Chart above). Africa’s liquidity problem is that it must finance a $50-billion current account deficit, and repay (or rollover) $10-billion of maturing Eurobonds during each of the next few years (next Chart) when financing options are likely to remain scarce (I am indebted to Gregory Smith of M&G Investments for these useful charts). On the other hand, foreign direct investment into Africa has averaged roughly $40-billion annually in recent years. Therefore, attracting the needed foreign capital inflows is possible, but it will be a close call.
Many nations may face a difficult choice. As a huge share of Africa’s tax revenues go simply to repay interest on its debt — both external and domestic — fiscal austerity will likely be required in many countries to service its liabilities unless market conditions improve (next Chart). This economic headwind would risk prolonging the region’s economic underperformance, and threatening Africa’s ability to respond to its serious future challenges. Default and restructuring may be the only option for some countries.
Liquidity Crisis: Who’s Most Vulnerable?
As discussed, there’s no “one Africa”: some countries are more vulnerable to this looming liquidity crisis. I use numerous metrics to assess which countries are most at risk. First of all, I look at the twin deficits — government budget balance and the external current account shortfall — to determine the stability of overall macroeconomic policy and the immediate need to attract foreign capital inflows. Secondly, the level and rate of change of both domestic and external debt help determine the sustainability of a country’s policy direction. Finally, the amount of government revenues and export receipts required to service existing debt sheds light on the ability to continue servicing the current level of liabilities. Also, countries with stronger long-term GDP growth prospects are better positioned to repay their debts.
Let’s take a quick look. The Chart above identifies Africa’s most indebted countries, and those in which government liabilities have risen most significantly in recent years. Zambia, Ghana, Sierra Leone (SL), and Zimbabwe stand out, along with Egypt, Congo, Tunisia, and Senegal.
Focusing on external debt, Tunisia, Egypt, and Mozambique are most elevated. Meanwhile, Zambia, Ghana, SL, Rwanda, and Benin have risen most sharply following the pandemic (Chart above).
Financial market borrowings are at the greatest risk of default in the near term. The Chart above indicates Egypt, Ghana, South Africa, Nigeria, Morocco, Angola, Ivory Coast, Gabon, and Benin are the largest African issuers of Eurobonds (thanks again to Greg Smith for this Chart). The most immediate risk of default emanates from countries with sizeable amounts of debt maturing in the next two years, including Egypt, Tunisia, Morocco, South Africa, Ethiopia, Gabon, and Angola (next Chart).
Putting all the pieces together, the countries at most risk are Ghana (even the “consistent growers” can go astray), Zambia, Egypt, Senegal, SL, Senegal, Malawi, Gambia, and Angola. Many others deserve close scrutiny, including Kenya, Ivory Coast, Rwanda, Burundi, Benin, Namibia, Niger, Zimbabwe, Mozambique, Mali, Tunisia, and Morocco. On the other hand, Tanzania, Cameroon, Botswana, and the Democratic Republic of Congo are among my favourites.