Many Sub-Saharan African countries seem to be in a position not that different from the one they found themselves in at the turn of the century: laden with government debt and running large fiscal deficits.
As a result, the sovereign default list is growing, with questions being raised about what this means for South African banks operating in debt-distressed nations — and which country will be next to fall.
For the moment, at least, local banks look to be fairly insulated. “Our banks don’t have a lot of exposure to African sovereign debt,” says Patrick Mathidi, head of equity and balanced funds at Aluwani Capital Partners. “The debts [they own] are there because they’re present in those jurisdictions.”
Granate Asset Management banks analyst Tyron Green is also sanguine. He tells the FM South African banks are well provisioned for defaults. And, in any event, South African regulations mean their foreign operations are “ring-fenced” from domestic ones.
Still, he adds, countries in distress “are on [banks’] radars”. And, says Mathidi, even as defaults are unlikely to “cripple” local banks, the exposure may be a drag on their future earnings.
The list of Sub-Saharan countries landing in default is growing. In February, Ghana followed Ethiopia, Chad and Zambia in having to restructure its debt after defaulting on a coupon repayment (the interest on its debt).
The default rattled investors in Ghana’s government bonds, denominated in the cedi (CD). As a result, the government restructured its domestic debt, issuing holders with new cedi-denominated debt with longer maturities and lower coupon rates.
The bulk of the “old bonds” were held by commercial banks and pension funds operating in the West African nation — including Absa, FNB, Standard Bank and Nedbank (through its 21.2% stake in Ecobank).
Most of the new debt — about 41% of the original value — has a maturity date of 2037.
That’s given the government breathing space but less so the local commercial banks. After its May monetary policy meeting, the Bank of Ghana counted the cost of the debt exchange.
“Most banks reported significant losses on the back of the mark-to-market valuation losses on their respective holdings in government of Ghana bonds,” the bank said. “Other losses were due to higher impairments on loans and rising operating costs.”
To put a number on that, the government’s overextension in a single fiscal year saw banks swing from a profit of CD7.4bn (about R11.7bn) in 2021 to before-tax losses of CD8bn last year, according to the central bank.
That, said finance minister Ken Ofori-Atta, was the result of the country’s tax-to-GDP ratio. In 2022 it was at about 12.6% — “woefully below the [Sub-Saharan Africa] average of 18% and insufficient enough to meet pressures on the public purse”, he told parliament.
By comparison, South Africa’s tax-to-GDP ratio was 24.9% in 2021/2022, according to the South African Revenue Service.
Ghana is also struggling to stabilise its debt. It’s not alone in that — the International Monetary Fund (IMF) warned in April of governments running dangerously high levels of public debt.
Ghana’s foreign-denominated debt is more than $23bn, or 45% of GDP. Its total debt was about 98% of GDP by end-December, according to its finance ministry. (Accra has now asked the IMF for $3bn in loans to try to stabilise debt.)
Meanwhile, Standard Bank provided R1.5bn for mark-to-market losses on the cedi-denominated bonds it held in Ghana in its 2022 fiscal year. Absa provided R2.7bn for the debt restructuring, and FNB R498m.
When Ghana defaulted earlier this year, there was an impact on Standard Bank and Absa, mostly, and to some extent FirstRand. But the banks are more than well provisioned
— Patrick Mathidi
The banks’ overall exposure is unclear, since they don’t split their African operations’ balance sheets from the whole group. But the impact of the debt restructuring should become apparent when they report their half-year profits to end-June from next month onwards (FNB will report full-year statements in September).
“When Ghana defaulted earlier this year, there was an impact on Standard Bank and Absa, mostly, and to some extent FirstRand,” says Mathidi. “But the banks are more than well provisioned.”
In addition, says Green, South African banks operating in other nations on the continent have “diversified baskets” of services, but these are typically in the areas of trading and dealing in foreign exchange.
Despite this, he’s “been cautious on [banks’] exposure to the rest of Africa and what type of growth comes from there. You have a lot of fintech coming into [forex trading] and disrupting that space.”
With the risk of rising defaults, the G20 nations have worked out a framework for debt renegotiation. They’re mindful that, unlike the turn of the century, when governments relied on conditional aid from the developed world, two large players are increasingly extending debt to developing markets on the continent.
China has emerged as a tough negotiator when it comes to restructuring Sub-Saharan African debt; the country is a relatively big creditor due to its funding of infrastructure projects around the continent.
Loan disbursements from China have slowed markedly since 2016, from close to 2% of the region’s GDP to roughly 0.2% in 2021. Over the same period, development assistance (mainly donor funds) remained comfortably above 2% of regional GDP, according to IMF data.
Then there are the private players. Sub-Saharan countries’ issuance of Eurobonds exceeded Chinese loan disbursements in all but one year over the decade to 2021. These offshore, foreign currency-denominated bonds are bought by private investors, mainly in developed markets.
But that’s come with its own pressures. On the list of debt uncertainty, Nigeria will have to settle about $1bn in Eurobonds in 2025, according to the IMF. And Kenya needs to repay $2bn next year.
That’s looking less and less likely in the East African country: its government debt-to-GDP ratio has jumped from an average of 46% for the decade to 2019 to about 67%.
Some market participants don’t see the need for a debt restructure in Kenya. But investors in shilling-denominated bonds may be concerned that the government will follow Ghana’s lead and restructure local-currency debt — about half of all its debt — to repay dollar debt.
As in Ghana, Standard Bank, Absa and Nedbank’s Ecobank affiliate all operate in the Kenyan market.
Countries in Africa borrow on average at rates that are four times higher than those of the US and even eight times higher than those of Germany
— UN
Concerns about the crushing effect of government debt are such that it was the focus of a UN report published last week.
At its launch, secretary-general António Guterres said about 3.3-billion people in the world will suffer as governments shift funding from “essential investments” to servicing interest and debt repayments.
“And yet, because these unsustainable debts are concentrated in poor countries, they are not judged to pose a systemic risk to the global financial system.”
Indicatively, government debt in developing nations grew at double the rate of that in developed nations between 2010 and 2022. And it’s coming at a steep premium.
By the end of March, the simple average spread of Sub-Saharan debt to the emerging market bond index global stood at 768 basis points (bp) compared with 225bp two years ago. This indicates a steep deterioration of sentiment by international investors after the tightening of monetary policy in the developed world.
“Countries in Africa borrow on average at rates that are four times higher than those of the US and even eight times higher than those of Germany,” the UN says. The organisation ascribes this to the heavy reliance on private creditors rather than cheaper funders such as the IMF and World Bank.
At these risk premiums, the big issuers of government debt in the region — including South Africa and Nigeria — are pricing for defaults on African government bonds, even if that’s an unlikely outcome.
The second problem the UN flags is that “the growing complexity of the creditor base makes it more difficult to successfully complete a debt restructuring when needed”.
This is borne out by Zambia, which defaulted on a Eurobond payment in December 2020 and only last month negotiated with its creditors — mainly foreign governments — on how to restructure loans worth $6.3bn.
This will be done along the lines of Ghana’s domestic debt restructure: extending the maturity of the debt by more than 12 years and cutting the coupon rate to only 1% during the first 14 years and not exceeding 2.5% thereafter, according to the Zambian finance ministry.
Neither the Ghanaian nor the Zambian experience bodes well for Sub-Saharan Africa as a destination for private debt investors. As far as the IMF is concerned, that’s locking the region out of international capital markets.
Last year, only $6bn in Eurobonds were issued by governments in the region, according to the fund’s data — of more than $6-trillion in such sales across the globe, according to estimates by data firm Dealogic.
It will take hard work for countries in the region to fix their fiscal frameworks to tap this large pool of investors at more reasonable interest rates — and to avoid further sovereign debt defaults.
In the meantime, South African banks are likely to continue trading carefully in other African regions, limiting their exposure to sovereign debts. That’s probably just as well — their woes at home are more than enough to keep them awake at night.
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