Toxic public debt chance for African firms to raise capital

Treasury secretary Henry Rotich
Treasury secretary Henry Rotich. FILE PHOTO | NMG 

Kenya’s public debt stands at over Sh5 trillion. Last year and this, international financial institutions and development banks such as the World Bank, African Development and the IMF cautioned Kenya over the pace, composition and terms of public debt accrual. But the appetite for debt continues unabated.

And Kenya is not alone. The Brookings Institution makes the point that since 2008, public debt in Africa countries has been rising at an increasingly rapid pace and by 2016, the continent’s gross public debt to GDP ratio had doubled.

Countries such as Chad, Sudan, South Sudan, Zimbabwe, Cameroon, Ghana, Eritrea, Ethiopia, Djibouti, Zambia, Zimbabwe, Mozambique and of course Kenya have been warned that their fiscal path and debt pile up is unsustainable.

The composition of debt is of particular concern. Kenya, for example, has a domestic-to-foreign public debt split of about 50-50. With the strengthening dollar, the cost of servicing foreign debt will be increasingly onerous.

This is in a context of chronic subpar revenue generation with revenue targets routinely revised downwards year on year. Thus, not only is the government unable to raise planned levels of revenue, it will have to figure out how to raise even more local currency to service foreign debt as the dollar strengthens.


Another favourite of African governments has been sovereign bonds, anS these too are becoming more expensive. Last week Bloomberg reported that spreads on Africa’s sovereign bonds had widened to 506 basis points (bp) above US Treasuries, the highest in two years.

Te Velde, an analyst, makes the point that at the current rate at which African countries issue sovereign bonds ($14 billion in the past year), a two percent (500bp-300bp) increase in cost of financing, means an increase in future cost of servicing newly issued bonds at more than $250 million a year. Let that simmer for a while.

Now this would perhaps be fine if there were assurance that African governments were using the debt effectively and in an economically productive manner.

But even that is not clear. What is clear is that the rapid accumulation of debt by African governments, partnered with serious questions about fiscal accountability, will translate into a massive drop in popularity the African governments have been enjoying in local and international debt markets. And this is good news for the African private sector.

Africa’s private sector continues to be under-capitalised and the past decade or so of considerable appetite for public debt from Africa has left most of the African private sector in the shadows.

However, debtors are beginning to understand that debt owed by African governments can be toxic.

And this presents the perfect opportunity for private sector in Africa to better position itself to domestic and international players for financing.

Let the African private sector grab this opportunity and show the world that much of Africa still has its head on right.