By Tsidiso Disenyane

At a time when most African economies are achieving sustained economic growth of more than 5% a year, with ambitions to raise this further, there is a risk that a slide back into indebtedness could undo recent economic gains.

African countries have a pressing need to ramp up infrastructure investment and maintain their economic growth momentum. The African Development Bank asserts that the continent’s infrastructure needs require funding of $360-billion by 2040. However, public funds to finance this need are limited, compelling governments to finance such infrastructure projects from new funding sources, including concessional funds from multilateral institutions, commercial bank loans, and nonconcessional financing by raising international bonds and from lenders like China and Brazil.

In their quest to step up investment spending through new forms of funding, many countries that graduated from debt-relief initiatives are experiencing rising debt burdens again. The World Bank has observed that a number of African countries, including Ghana, Uganda, Senegal, Niger, Malawi, Benin and Mozambique, have overborrowed since receiving debt relief. The bank further warns that, if these countries continue to borrow and grow at current rates, the risk of fiscal deterioration and debt distress will be imminent.

The key threat to sovereign profiles is posed by the countries’ widening fiscal deficits. To meet their infrastructure and development needs, countries have embarked on ambitious capital investment projects, while, in others, current spending has been on the increase, often due to surging expenditure on wages and salaries. This has caused Budgets to expand rapidly, without compensating for the additional expenses through commensurate increases in revenues.

These imbalances have been a major cause of recent fiscal deterioration in countries like Ghana, Gabon, South Africa and Kenya. In its recent Medium Term Budget, South Africa acknowledges that “fiscal consolidation can no longer be postponed” and that concerted efforts are required to halt the deteriorating fiscal dynamics and ensure debt sustainability.

Recent developments also indicate that external risks are on the rise. Most dollar commodity prices (including those for energy, minerals and agricultural products), have fallen since the first half of 2014. The World Bank and the International Monetary Fund (IMF) report that the prices of commodities will continue to plunge further in the medium term, partly as a result of the continued slowdown in global demand, rising supplies and the appreciation of the US dollar.

This scenario raises serious questions about many economies’ fiscal sustainability. Over the past decade, higher commodity prices have boosted the external and fiscal accounts of commodity-producing countries. A study by EY shows that Africa’s ability to cover its total debt service through commodity export earnings has strengthened fourfold, on average, since 2007.

However, current low prices are mostly below commodity exporters’ fiscal breakeven prices. For those countries that may not have sufficient fiscal buffers to absorb the falling price, the pressure to borrow to maintain fiscal expansion will also increase. This has the potential to exacerbate these countries’ debt burden if they are unable to accrue the necessary export earnings to service their yearly debts.

It is also my belief that sovereign-bond- issuing States will also face higher debt stresses owing to tightening monetary policy in the US and currency movements. The transition to issuing international sovereign bonds partly reflected a bullish market hunting for yield during a period of low interest rates in advanced economies. This, of course, was not everlasting. The recent start of normalisation of monetary policy in the US and the repricing of emerging-market risks means that countries will have to start allocating bigger proportions of their Budgets toward paying interest, while paying off less of their debt. The repricing of sovereign bonds issued by a range of African countries was already under way towards the end of 2014 as dollar-denominated bonds in Nigeria, Zambia, Ghana, Senegal and Kenya tumbled, sending yields higher. The recently announced monetary stimulus package for the eurozone, if successful, can turn the tide and sustain the momentum of lower yields in sovereign-bond-issuing States.

The depreciation of many African currencies against the US dollar also tends to increase the cost of capital and interest in local currency terms. This can undo the benefits of lower interest rates on sovereign bonds than on domestic bonds. The scale of the currency rate risk is considerable if the borrower is dependent on the exports of a few commodities for fiscal and foreign earnings. For example, copper is Zambia’s main export commodity and the key fiscal and foreign revenue earner. When the price of copper fell sharply in early 2014, this affected fiscal revenue. The country subsequently approached the IMF to discuss an economic reform programme – just a few months after launching a $1-billion bond issue at 8.5%, compared with 5% for its 2012 issue.

While the likelihood of widespread sovereign default in Africa is not imminent, the speed at which debt has been accumulated, the management of government borrowing and expenditure, and external imbalances are causing concern.

Countries face difficult choices related to infrastructure investment: should they continue borrowing to meet development objectives, even if debt levels rise beyond certain thresholds, or should they be more prudent, potentially foregoing opportunities for growth-enhancing investments? Clearly, countries need to be mindful of the risks of accumulating debt against the prospect of an acceleration of growth in the future. In light of this, borrowing should be in step with, and supportive of, progress in strengthening the capacity to repay through better policies and institutions to accelerate growth, discreet debt management to keep debt to reasonably low levels and ensure new borrowing in the right amounts and on appropriate terms, and measures to increase resilience to exogenous shocks.

Disenyane is senior economist at the Export Credit Insurance Corporation