When rich countries wrote off billions of dollars of African debt in 2005, they hoped governments would think twice about borrowing again in costly foreign currencies.
Over a decade later, most sub-Saharan African countries still rely on US dollar-denominated debt to finance their economies. Some investors say this is sowing the seeds of future debt crises if local currencies devalue and make dollar debt repayments more expensive.
Aside from South Africa and Nigeria, governments have not yet done enough to develop capital markets that would have allowed them to raise more money in their own currencies, investors say.
United Nations trade body, UNCTAD, estimates that Africaâs external debt stock rapidly grew to $443 billion (Sh45.78 trillion) by 2013 through bilateral borrowing, syndicated loans and bonds. But since then sharp currency devaluations across the continent have pushed up the cost of servicing this debt pile, which continues to grow.
âWe all thought (Africa) was going to be the next emerging market. Governments should have been getting rid of dollar liabilities and moving into local currency liabilities, which is what Brazil did 20 years ago and Mexico 30 years ago,â said Bryan Carter, head of emerging debt at BNP Paribas Investment Partners.
In 2007 Carter was optimistic enough to hold a third of his fund in sub-African local debt. Now he has zero exposure outside of South Africa, he said, adding: âThey just fell back into the âoriginal sinâ trap of borrowing in dollars.â
After the debt, owed to multilateral organisations such as the International Monetary Fund, was wiped out, investors such as Carter were prepared to accept the risks of buying local currency bonds, in exchange for higher returns.
That would have allowed governments to run their economies, regardless of exchange rate moves between the US dollar and domestic currencies. Currency and interest rates fluctuations have long been a source of emerging market crises.
Stimulating local bond markets, could have helped start a domestic savings and investment industry and also helped to reduce the reliance on commodities exports - a major source of the dollar income needed for debt repayments.
But there has been little progress on the steps needed to foster local debt markets â pension reform, inflation targeting and making currencies more flexible. Those markets that have emerged are small and with low trading volumes, a similar story to many African equity markets.
Data from Frankfurt-based index provider Concerto Financial Solutions shows 37 sub-Saharan African nations with outstanding local currency debt of just under $260 billion (Sh26.87 trillion) by end-2016.
Of that $146 billion (Sh15.09 trillion) is from Africaâs most developed economy, South Africa, while Nigeria accounted for $40 billion (Sh4.13 trillion) â the only African markets big and liquid enough to qualify for the GBI-EM index, widely used by emerging debt investors
Concerto said stripping out South Africa, 16 African countries have borrowed roughly $30 billion (Sh3.10 trillion) in bonds since 2007. In addition, China has extended tens of billions of dollars in loans and some countries have new debts to multilateral lenders.
âWhile Africaâs current external debt ratios currently appear manageable, their rapid growth in several countries is a concern and requires action if a recurrence of the African debt crisis of the late 1980s and the 1990s is to be avoided,â UNCTAD warned last year.
Other emerging markets in contrast have shifted almost entirely to borrowing at home. Debt denominated in emerging currencies totals about $15 trillion (Sh1.55 trillion), or 80 per cent of the developing worldâs bond stock.
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