Notes from the road: Africa

Increasingly in the spotlight

Home to many growing and transforming ‘frontier’ economies, Africa is an increasingly important component of many EM debt portfolios. Africa was caught in the eye of the storm in 2022 as the tightening of global liquidity resulted in a ‘sudden stop’ in foreign investment, closing off a key source of funding for many and necessitating a debt restructure for some. The sell-off was indiscriminate in a region that has significantly different underlying drivers; this is likely to create compelling opportunities for investors as markets move their focus back to fundamentals.

We have previously commented on the significant dispersion in Africa’s debt markets; my recent trip to Angola, Ghana and Côte d’Ivoire highlighted how this has risen further over the past few years. Here are some observations in the context of last year’s sell-off, African policymakers’ responses, and the significant dislocation that created in some bond market valuations.

Overlooked fundamental strength: Angola and Côte d’Ivoire

Angola and Côte d’Ivoire are notable examples of African countries making positive policy shifts while enjoying reasonable access to finance. Yet they are still penalised by excessively high yields and spreads relative to high-yield markets in other parts of the world.

Finding funding flexibility

Despite these two countries not having access to external debt markets since early 2022, various meetings left me confident that neither has an imminent need to issue external debt. A key reason for this is that either they have access to multilateral financing at a lower cost or that their reserve dynamics have been supported by reasonably tight monetary and fiscal policy:

• Angola’s debt and external dynamics are underpinned by tight fiscal and monetary policy as well as higher oil prices. This has meant that the government is comfortable to remain outside an IMF programme and is instead looking to tap into international financial institutions to fund budget spending and projects.
• Côte d’Ivoire is likely to target a new IMF programme in March which could include additional IMF funding under the Resilience and Sustainability Trust. Debt issuance that is partially guaranteed by multilateral development banks such as the African Development Bank was also clearly well advanced, reducing the need for Eurobond issuance.

Overall, between expanding local market liquidity, multilateral financing, and avenues related to more direct financing for sustainability-related projects, it is clear that governments such as Angola and Côte d’Ivoire have several funding options available to them.

Reforming and refocusing

As both Angola and Côte d’Ivoire continue to recover from the 2020 crisis, the last few years have seen both enact significant reforms. Key among these are measures to boost private-sector involvement in the economy to make space for the government to increase social spending.

Over recent months, reforms undertaken by the Angolan government have borne significant fruit. These include rule changes in the oil sector aimed at increasing private-sector involvement and boosting investment and output – culminating in the announcement of two major international partnerships. The country’s ministry of finance expects GDP growth to reach 2.7% in 2022, as both oil and non-oil sectors have experienced a reasonable rebound. That said, my visit to the country confirmed the view that the low-hanging fruit has been picked and although the government has achieved macroeconomic stability, the next chapter of reforms – including diversifying the economy and attracting foreign direct investment – will be significantly more challenging.

As for Côte d’Ivoire, while the government’s target of 75% private sector participation seems very ambitious, it is clear that the push for more private sector involvement is coming from the top, as the government’s focus is shifting to social investment. Côte d’Ivoire’s economic growth outlook remains very positive; I got the same message from all government and private sector meetings –significant and broad-based investment is taking place across the country. More importantly, the investment is moving to higher value-add parts of the economy, with agri-processing an example of a sector where I learned that several large investments are officially underway.

Sustainable shifts

When they do access external debt markets, both Angola and Côte d’Ivoire plan to focus on sustainability-related debt issuance; this was a theme that came up in various meetings in both countries, reflecting evolving spending patterns in the region. The increasing emphasis placed on the private sector is allowing the government to scale back on big-ticket capital expenditure items in favour of social spending (such as healthcare and education investment). All of this speaks to governments that have woken up to the need to make greater room in public finances to support populations that have struggled with COVID-related disruption followed by cripplingly high food and energy prices, and the associated risks to social stability. The key will be balancing popular policymaking with the need for fiscal prudence – the phasing out of fuel subsidies will likely test Angola in this regard over the coming months.

Implications for debt investors

Given the combination of a limited need to tap external debt markets and prohibitively high current costs within these, near-term net issuance from these markets is likely to remain low unless yields fall significantly. This should continue to support existing bond prices while also suggesting that fears of an immediate liquidity crisis spreading more broadly across Africa are overstated in current valuations. Longer term, should the external market remains closed and yields remain high, stress could build and we would expect policymakers to double down on efforts to reduce fiscal and external deficits.

Learning from painful mistakes: Ghana

In contrast to the above examples, Ghana took way too long to right the economic ship or approach the IMF for support. This is a cautionary tale of a market that relied too heavily on external markets for financing and paid the price. But lessons seem to have been learned and market valuations are failing to take that into account.

Delays in taking tough policy decisions culminated in a currency crisis and the need to restructure external debts. The shock of how quickly the situation deteriorated last year can still be felt, but now there appears to be a consensus among all parts of government and the private sector that hard decisions – such as broad-based restructuring and fiscal reform – are unavoidable and that it makes sense to pursue an IMF programme that includes a very comprehensive debt restructuring.

The positive difference between Ghana and other countries undergoing debt restructuring is that Ghana and its advisors have made it clear that time is of the essence in completing the restructuring, and that the reforms required to get IMF board approval are well advanced, especially as the government wants a clean slate in the run-up to the 2024 elections. Ghana’s restructuring includes local debt and this significantly improves external debt recovery prospects. Furthermore, when markets were still open, Ghana used the opportunity to lengthen the curve of its debt – the first large maturity is only due in 2025, making large extensions of debt unlikely.

Shorter term, I left the country more positive on its chances of securing an IMF programme faster than I had previously anticipated; the local debt restructuring is likely to have higher participation than I had expected and that will provide significant relief, and it’s clear when it comes to external debt that authorities want a friendly and timely restructuring.

Relative to other African countries, it was also clear to me just how much the cedi has overshot to become cheap relative to the rest of Sub-Saharan Africa. As for longer-term fundamental considerations, there remain questions – especially with regards to what Ghana’s banking sector will look like after the local debt restructuring and whether the country can find ways to grow through increased foreign direct investment while keeping fiscal policy tight for a significant period of time. However, those questions are more of a second-order nature as in the short term current valuations apply an excessive ‘stress premium’ to this market.