Embargo: Wednesday 28th January, 2015, 00:01
The exchange rate risk of sovereign bonds issued by governments in sub-Saharan Africa in 2013 and 2014 is threatening losses of $10.8 billion - a value equivalent 1.1% of the region’s Gross Domestic Product (GDP), says a new paper launched today by leading UK think tank the Overseas Development Institute (ODI).
This is because sovereign bonds are issued and repaid in US dollars but local currencies depreciated significantly in 2014, threatening sub-Saharan African governments’ ability to repay the bonds to investors, says Judith Tyson author of the report ‘Sub-Saharan Africa's International Sovereign Bonds’.
Repayments are dependent on continued strong economic growth in sub-Saharan Africa but growth is now at risk of stalling as export markets slow and commodity prices - especially oil - plummet.
The irresponsible use of funds by some governments is contributing to the problem. Mozambique borrowed US$ 850 million for their national fishing industry but instead spent the money on military boats and equipment. Ghana has frittered away funds on public sector pay increases.
Other countries are simply over borrowing in relation to their GDP. These include the Seychelles, Senegal, Mozambique, and Gabon.
“Today’s economic environment in sub-Saharan Africa is similar to the boom that preceded the bust in the debt crises in Africa and Asia in the 90s when western governments and banks wrote off billions of pounds of debt. Today billions of dollars are again at stake, not to mention the financial stability of the region”, said Ms Tyson.
The ODI report suggests that governments be held more accountable for the responsible use of funds by national institutions, development agencies and investors so that funds are used wisely to continue sub-Saharan Africa’s economic boom.
It also says that it is in investors’ interests to choose more wisely which countries they lend to and how much to ensure that there are no future defaults.
The report suggests that capital controls may be needed to stabilise the region’s financial systems if these actions aren’t taken.
Sovereign bonds are a popular way of financing development in emerging economies as investors lend with little conditionality compared to multilateral banks such as the International Monetary Fund (IMF) or the World Bank.
2013 and 2014 saw a surge in lending through sovereign bonds in Sub-Saharan Africa.
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For a copy of the report ‘Sub-Saharan Africa's International Sovereign Bonds’ or to interview the report author Ms Judith Tyson please contact ODI’s media manager Clare Price on +44 7808 791 265 or email [email protected]