Apart from changes in the overall value of countries’
external debt, there have also been important shifts in the composition of that debt. Over the past ten years, the importance of private sector external debt has been growing. As shown in figure 8, from a negligible proportion at the turn of the previous century, private debt has grown to about a fifth of total external debt in 2010.
Figure 8. Private and public external debt
Percentage
Figure 9 gives a detailed breakdown of SSA’s long-term external debt.5 Several observations can be made.
Firstly, while official creditors (bilateral and multilateral) accounted for about 80% of total external debt in 2000, in 2013 this figure has decreased to 55%, driven by a decrease in bilateral debt from almost 50% to 25%.
Secondly, as a result of the first trend, the presence of private creditors in the public and publicly-guaranteed (PNG) debt has substantially increased, from 10% to almost 25% of total external debt in the same period.
This is due mostly to an increase in external bonds from about 5% to just under 15%. Thirdly, PNG, as already indicated in the previous figure, has increased from less than 5% to almost 20% of total long-term external debt. While most of this is commercial bank debt, private sector bonds have also grown over-time.
Fourthly, bond markets, both public and private, have developed substantially, and now, account for 20% of total external debt, with a total capitalisation of about US$ 73 billion.
Figure 10 looks at disbursements by composition.
Overall the disbursements have increased substantially in the 2011-2013 period, while, as shown in the previous section, debt-sustainability indicators show a mild deterioration. Total disbursements in 2013 have more than tripled since 2005 from US$ 13 billion to US$ 50 billion.
Although disbursements from official creditors remain important, there has been a remarkable expansion of debt flows to the private sector since the crisis. Bond markets in particular, which were almost irrelevant as a source of credit in 2005, have expanded dramatically: between 2011 and 2013 SSA private and public sectors have issued just under US$ 30 billion of bonds, which amounts to 70% of the total external bonds stocks at the end of 2010. Moreover, as reported by Vellos (2015), the geographical scope
of these issuances has also broadened, with a total of 11 countries accessing international bond markets in SSA, some for the first time.
Overall these figures show an increasing involvement of the private sector in SSA’s external debt. The public sector, previously reliant almost entirely on official credit, has become able to access private debt markets, through both commercial banks and bond markets. At the same time the SSA private sector has expanded its international borrowing, mostly through access to international banks, but recently, though to a smaller extent, also to corporate bond markets.
These trends are the product of two interrelated phenomena. First, the growing integration of African countries into the global financial system. International financial investors, subject to the low-interest rate Figure 9. Long-term debt composition
Figure 10. Disbursements composition 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 PNG, bonds PNG, banks and other creditors PPG, bilateral
PPG, multilateral PPG, banks
PPG, bonds
PPG, other private creditors
0 10 20 30 40 50 60
2005 2006 2007 2008 2009 2010 2011 2012 2013
PPG, official creditors PPG, bonds PNG, bonds
PPG, other private creditors
PNG, commercial banks and other creditor Disbursements
USD billions
environment in Japan, North America and Europe, have been attracted by the substantially improved fundamentals of many developing countries, in a
‘search for yield’ for their portfolio investments.
Although SSA remains the most peripheral of the developing regions in terms of financial integration, it has become a potentially attractive source of high-risk high-return investments.
For example, the leading MSCI equity index provider features three countries – Nigeria, Mauritius and Kenya - in its ‘frontier markets’ index, with Nigeria being the second biggest component of the index as of December 2015. Similarly, many African countries are part of the leading JP-Morgan bond indices, both the dollar denominated EMBI index, and the local currency bond index GBI-EM.6
Second, official development policy has itself become more supportive of the private sector. As documented in Bonizzi et al., (2015), there has been a shift in the official development policy consensus towards the promotion of private sector. Indeed, a substantial part of official flows from advanced countries goes to support private sector initiatives, including the financial sector, rather than humanitarian purposes.
Furthermore, official flows themselves are increasingly being augmented with private funds through the process of ‘blending’, whereby private financial
institutions complement the official aid budgets with guarantees being provided by the borrowers and/or the donors.
This policy consensus helps explain the expansion of private sector lending to SSA. Indeed, the proportion could be even higher, since some of the official flows recorded in database hitherto presented could also potentially include substantial private flows registered as ‘official’ due to the ‘blending’ phenomenon.
Nonetheless, as shown in Figure 11, while the average grant component on all new debts – the proportion of debts at a favourable rate – has declined overall, it has actually increased for loans from private institutions since 2009. This is likely due, at least in part, to the
“blending” phenomenon.
The increasing presence of the private sector has two straightforward implications for the debt sustainability of SSA countries. First of all, while it is conceivable that most of the private sector debt is long-term, in general private lenders and private borrowers require higher interest rates. As shown in figure 12, interest rates have overall declined, in line with global trends, but interest rates charged by private lenders remain substantially higher than those for official loans. This results in a higher debt burden: as shown in figure 13, the total debt servicing cost of private debt outweighs the share of private debt to total external debt.
Figure 11. Grant component
0 10 20 30 40 50 60 70 80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Official Private
Total
Percentage
Second, interest rates on private external debt are determined in global markets. While this clearly applies to bond markets in general, the same applies to all external debt to SSA African countries. The proportion of variable rate debt, i.e. debt whose interest rate floats with markets rates such as the LIBOR, increased from 11% to about 32% over-time (see Figure 14).
These increases have been effectively driven by the expansion of private debt: changes in variable rate debt, as shown in figure 15, are driven by changes in private debt, except in the last two years. This indicates that private debt is more directly exposed to fluctuations to global market changes.
Figure 12. Interest rates
Figure 13. Debt servicing shares 0%
1%
2%
3%
4%
5%
6%
7%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Official Private
Total
(% of total external debt) (% of total external debt servicing cost)
Overall, the recent changes in the composition of SSA countries external debt indicate an increasing involvement of private sector institutions, both as borrowers and lenders. Compared to public sector debt, interest rates on private sector debt are higher and typically linked to global market rates. These factors, combined with the observation about potential reversals of the secular decline in external indebtedness of SSA countries, suggest that external debt sustainability may warrant attention, in the coming years.
II. CAUSES AND IMPLICATIONS OF RECENT CHANGES IN EXTERNAL DEBT OF SSA COUNTRIES
This section explores a number of causes and implication of the changes in external indebtedness seen in the previous section. The first part discusses
the role of commodity prices and balance of payment issues as contributors to the recent surge in indebtedness of SSA countries. The second section deals with the integration of SSA countries into the global financial system.
A. COMMODITY CYCLES AND