Debt crisis: African countries face rollover risk as bonds mature

Many African countries will face problems refinancing loans as bonds mature over the next decade, warns a report published on 28 June by Moody’s Investors Service.

In the report, David Rogovic, vice president and senior analyst at Moody’s Investors Service, warns that a “wall” of bond maturities, combined with deteriorating financial conditions, will increase financial pressure on many African sovereigns as they seek to roll over debt, especially those at the end of the rating scale.

But there is still time to take action to restore lender confidence, according to the report.

Financing pressures will increase

“A maturity wall is approaching. Maturities on international bonds issued in the previous decade will peak in 2024 and remain elevated for the next decade. This upcoming maturity wall will increase financing pressures, particularly for lower-rated sovereigns with a limited track record of refinancing international bonds,” he writes.

Moody’s says Ghana, Tunisia, Kenya, and Egypt are particularly vulnerable given their relatively low current reserve coverage of principal repayments due between 2022 and 2026 if they are unable to roll over their maturing bonds.

Moody’s also notes that Ghana’s few financing alternatives increase its credit risks, while Gabon and Namibia face financing pressure ahead of bond maturities in 2025.

“Ghana’s maturities do not peak until 2026, but fewer financing alternatives increases its credit risks. Gabon (Caa1 stable) and Namibia (B1 stable) will face financing pressure ahead of bond maturities in 2025.”

Rise in international borrowing costs

The report argues that Russia’s invasion of Ukraine in February has accelerated rate increases by central banks in advanced economies, contributing to a rise in international borrowing costs.

“Financial conditions are deteriorating as governments are still grappling with successive shocks. Rising borrowing costs has already seen a number of sovereigns postpone or cancel international bond issuance. These more difficult market conditions coincide with increased borrowing requirements as a result of weaker growth and social spending pressures triggered by Russia- Ukraine crisis.”

For instance, Kenya has postponed its planned debt issuance in response to rising yields.

Côte d’Ivoire has followed the same path by delaying its issuance plans and relying only on the regional bond market to meet its financing needs for this year.

Inflationary pressures due to the rise in energy and food prices expose countries to tight financial conditions. The Covid-19 pandemic and the war in Ukraine have only exacerbated already existing trends, including increased food prices and debt-to-GDP ratios.

Fiscal consolidation could ease pressure

According to Moody’s, Zambia, Tunisia, Rwanda, Namibia, and Ghana have seen their debt-to-GDP ratios rise by more than 25 percentage points since 2016, while Kenya, Côte d’Ivoire and Senegal also saw significant increases over the same period.

“Fiscal consolidation that restores investor confidence and an improvement in global financing conditions could ease financing pressure over the next two years. There is still time for sovereigns to refinance large upcoming maturities. An improvement in fiscal metrics in particular would engender investor confidence and increase funding options. The anchor provided by IMF financial support conditionality increases the likelihood of sustainable improvements in programme countries,” says Moody’s.

Domestic bonds pose separate problem

A surge in domestic bonds also offers pause for thought for policymakers. In recent years, international bonds have become less important as a financing tool for African countries.

“During the pandemic, countries of sub-Saharan Africa turned to domestic bonds, rather than Eurobonds, to finance new debt,” says a report by the African Growth Initiative at Brookings. 

Between 2019 and 2020, the value of eurobonds issued by sub-Saharan African countries declined from $47bn to $45bn whereas the value of domestic bonds went from $34bn to $73bn over the same period.

Although eurobond maturities are approaching, domestic issuances represent an even bigger threat for countries, particularly as they constitute high-interest burdens. In Kenya, even though the debt is split roughly evenly between domestic and external debt, more than three-quarters of interest expenditure is spent on domestic debt, says the report.