KPMG: Is issuing debt instruments a viable option for African governments?
Robbie Cheadle, Associate Director, Deal Advisory and Capital Markets at KPMG, and
John Geel, Managing Partner, Deal Advisory at KPMG
We live in a world where debt has become a part of life. As much as we are certain that the sun will rise in the morning, we know that we will fund high value items using long-term debt. The same applies to our governments which we rely on to make sensible and considered decisions on our behalf.
Post the 2008 global financial crisis, bank funding has become more difficult to obtain. As a result, African governments, who desperately need to grow their economies in order to alleviate large scale poverty in their countries, are turning more and more to domestic central government marketable debt instruments (“Government Marketable Debt”) and sovereign debt as an alternative method of funding their domestic development requirements.
Infrastructure and the ability to provide electricity are major inhibitors to growth in most African countries and the lure of Government Marketable Debt and sovereign debt as a method of funding capital intensive infrastructure projects is very strong. The five largest economies in Africa, namely Nigeria, South Africa, Egypt, Morocco and Kenya are all restrained, to some extent, by poor infrastructure, including their ability to provide electricity. Based on the World Bank 2015 Ease of Doing Business Survey (“Survey”), the ability of these five countries to provide electricity (calculated using the formula 1-(relevant countries rating per the Survey / the total number of participants in the Survey) is as follows: Nigeria 1%, South Africa 16%, Egypt 44%, Morocco 52% and Kenya 20%. Similarly, the extent that infrastructure deters investment in these same five countries, according to the participants in the Frasier Institute Annual Survey of Mining Companies 2014 is as follows: Nigeria 89%, South Africa 43%, Egypt 45%, Morocco 31% and Kenya 38%.
The attractiveness of using Government Marketable Debt and sovereign debt is compounded by the numerous publications and research documents promoting the usefulness of these instruments as a viable method of funding for African governments. In considering whether the assumption of additional government debt is really an option, African governments need to carefully consider a number of factors, including most importantly their existing debt position on a holistic basis. The published debt figures for the countries of the world tend to be split up into total domestic government debt and sovereign debt with the result that each governments’ total indebtedness is not that easy to establish. Total domestic government debt for African countries has generally increased between 2013 and 2014. The five African countries with the highest levels of total domestic government debt as a percentage of gross domestic product (“GDP”) for 2014 are Zimbabwe at 181%, Egypt at 94%, Morocco at 77%, Ghana at 73% and Mauritius at 61%. Kenya at 59% and Mozambique and South Africa at 47% each are also among the more indebted African countries. If the sovereign debt owing by African countries is brought into the equation, the total debt position for certain countries becomes fairly concerning, particularly against the current backdrop of declining global mineral prices, declining global foreign direct investment (“FDI”), inadequate energy supplies, lower growth rates and weaker exchange rates.
In conclusion, Government Marketable Debt is a useful tool available to African governments to fund much needed infrastructure projects and power initiatives. However, the ability of improved infrastructure and electricity generation to contribute to each countries anticipated GDP growth and FDI inflows needs to be compared to the cost implications of incurring additional government debt and the government’s ability to fund interest and debt repayments timeously. The potential negative cash flow implications of paying interest and settling government debt that is denominated in a foreign currency, particularly the continuously strengthening US dollar, also needs to be considered.