When rich countries wrote off billions of dollars of African debt in 2005, they hoped governments would think twice about borrowing again in costly foreign currencies.
Over a decade later, most sub-Saharan African countries still rely on US dollar-denominated debt to finance their economies. Some investors say this is sowing the seeds of future debt crises if local currencies devalue and make dollar debt repayments more expensive.
Aside from South Africa and Nigeria, governments have not yet done enough to develop capital markets that would have allowed them to raise more money in their own currencies, investors say.
United Nations trade body, UNCTAD, estimates that Africa’s external debt stock rapidly grew to $443 billion (Sh45.78 trillion) by 2013 through bilateral borrowing, syndicated loans and bonds. But since then sharp currency devaluations across the continent have pushed up the cost of servicing this debt pile, which continues to grow.
“We all thought (Africa) was going to be the next emerging market. Governments should have been getting rid of dollar liabilities and moving into local currency liabilities, which is what Brazil did 20 years ago and Mexico 30 years ago,” said Bryan Carter, head of emerging debt at BNP Paribas Investment Partners.
In 2007 Carter was optimistic enough to hold a third of his fund in sub-African local debt. Now he has zero exposure outside of South Africa, he said, adding: “They just fell back into the ‘original sin’ trap of borrowing in dollars.”
After the debt, owed to multilateral organisations such as the International Monetary Fund, was wiped out, investors such as Carter were prepared to accept the risks of buying local currency bonds, in exchange for higher returns.
That would have allowed governments to run their economies, regardless of exchange rate moves between the US dollar and domestic currencies. Currency and interest rates fluctuations have long been a source of emerging market crises.