Date: 31 July 2019 Kigali, Rwanda

1. Increasing African Sovereign Debt: Implications for the growth and stability of the financial system Dr. Vera Songwe, UN Economic Commission for Africa@SongweVera Date: 31 July 2019 Kigali, Rwanda

2. A decade to 2030 – Are we on track? www.uneca.org African Sovereign Debt

3. The current level of revenue is below what is required to achieve the Sustainable Development Goals (SDGs). To meet the SDGs: • Incremental financing needs estimated at between $614 billion and $638 billion per year. • while incremental spending needs for low-income countries and lower middle-income countries are estimated at $1.2 trillion per year. • This translates into an estimated 11 per cent of GDP between 2015 and 2030. www.uneca.org African Sovereign Debt

4. The ECA Economic Report on Africa Identifies 5 key sources of revenue that could lower the financing gap www.uneca.org African Sovereign Debt

5. Nevertheless, increase in revenue alone is not a sufficient source of financing • Debt sustainability is important for ensuring achievement of the SDGs • Revenue leakages to pay off debt could be diverted from spending on the SDGs. • High debt levels, and therefore unstable macro economies could unravel development gains, pushing back the vulnerable in society into poverty. www.uneca.org African Sovereign Debt

6. Sustainable Debt: factors that increase the magnitude of the flow of debt www.uneca.org African Sovereign Debt

7. Debt to GDP ratios growing… www.uneca.org African Sovereign Debt

8. www.uneca.org African Sovereign Debt

9. Africa’s debt has taken an upward trend in recent years, growing at a faster rate. Debt grew at -9.4 per cent www.uneca.org African Sovereign Debt

10. On average, interest rates have been higher than GDP growth in Africa, indicating a rising debt burden www.uneca.org African Sovereign Debt

11. Widening fiscal deficit is correlated to faster growth of debt (2008 – 2018) www.uneca.org African Sovereign Debt

12. The countries with the highest fiscal deficits, had the fastest rate of growth in debt www.uneca.org African Sovereign Debt

13. Similarly, an increase in the current account deficit is correlated to faster growth of debt (2008 – 2018) www.uneca.org African Sovereign Debt

14. Ethiopia’s imports have tripled compared to exports, leading to a widening of the current account www.uneca.org African Sovereign Debt

15. Consequently, the pace of growth in debt picked up www.uneca.org African Sovereign Debt

16. Growth rate of debt is faster at lower interest rates: External rates have been low since 2008. www.uneca.org African Sovereign Debt

17. There has been a steady rise in the amount of Eurobonds issued in Africa since 2009 www.uneca.org African Sovereign Debt

18. High infrastructure financing needs remain… Source: ICA, 2017 and AfDB, 2018 www.uneca.org African Sovereign Debt

19. Rising debt servicing costs… www.uneca.org African Sovereign Debt

20. Country examples …… www.uneca.org African Sovereign Debt

21. Official Exchange rate risk… www.uneca.org African Sovereign Debt

22. Impact of rising public debt on sustainable growth and financial stability www.uneca.org African Sovereign Debt

23. Negative link between increasing public debt and sustainable growth www.uneca.org African Sovereign Debt

24. Negative link between increasing public debt and sustainable growth • Crowding-out private investment • Rising cost of borrowing • lower investment • higher public deficit • High future taxes – negative intergenerational transfers • Future inability of the government to spend on development expenditure • Currency or banking crisis www.uneca.org African Sovereign Debt

25. Reserves to external debt declining… www.uneca.org African Sovereign Debt

26. Risk of foreign currency borrowing vs. Benefits of local currency borrowing Promote development of domestic bond markets Crowding-in local private sector (institutional investors, banks and retail investors) Lower precautionary reserve holdings Diversified creditor and investor base High yields coupled with lower servicing costs • Increase in debt servicing costs and refinancing risk • Foreign exchange exposures • Vulnerability to external shocks • Short-term commercial debts and upward interest rates • Lack of depth of local capital markets • Poor debt management strategies and capacity www.uneca.org African Sovereign Debt

27. Growing Local Currency Debt Markets • An opportunity to raise corporate debt and reduce burden from bank financing. • Nigeria – Naija bonds – 12 billion Nigerian naira denominated bond ($76m) issued in 2013 and 100% locally subscribed. • Rwanda – Umuganda and Twigire bonds –Rwandan franc bond worth $22m issued in 2013 at 12.25% yield. • Indonesia – Komodo bonds – 4 trillion Indonesian rupiah ($298m) bond issuance oversubscribed four times in 2017. www.uneca.org African Sovereign Debt

28. Policy Response • Increase borrowing in local currency in both domestic and international markets to lower exposure and exchange risks. • Update and adapt debt management frameworks and strategies to new debt structures, macroeconomic uncertainty and global market risks – e.g. State-Contingent Debt Instruments (SCDIs) • More innovative financing mechanisms (e.g. blended finance, PPPs and other risk mitigation mechanisms) to crowd-in private sector investment. • Rebalance fiscal policy to maintain government spending while increasing revenue to reduce fiscal deficits without austerity. www.uneca.org African Sovereign Debt

29. THANK YOU! www.uneca.org