The IMF has welcomed the return to international markets of three countries in Sub-Saharan Africa after a two-year hiatus, even though the cost of financing was “on the high side”.
While the countries of the region have historically faced higher borrowing costs than peers in other regions, raising questions about whether investors charge an “African premium”, the fund’s research has found this premium to be quite modest.
Kenya, Ivory Coast and Benin have successfully tapped international markets for capital in 2024, but cash-strapped Kenya issued bonds at a steep yield of more than 10% in dollar terms to meet urgent financing needs, with average yields for the region at their highest in many years as investors demand high returns to lend to it.
Releasing its latest Sub-Saharan Africa and fiscal reports in Washington last week, the IMF highlighted the region’s improved economic prospects and market access. But it also warned of “higher for longer” financing costs for the region, and urged countries — including SA — to stabilise public debt levels sooner rather than later.
Persistent inflation pressures in the US have prompted many in the market to push out expectations for the first interest rate cut, with some now fearing the Federal Reserve may not cut at all in 2024.
The head of the IMF’s Africa department, Abebe Aemro Selassie, said this pointed to the uncertainty policymakers in the region were having to contend with. “The practical effect is that it will mean in all likelihood the cost of financing will remain higher for a bit longer for our countries,” he said.
But he noted that SA still benefited from having a deep and liquid domestic market, which was the envy of emerging markets in Africa and elsewhere. “The government has always had this tremendous ability to borrow in rand to do the lion’s share of its financial operations. So that will help shield the cost of financing from going up simply because the Fed is going to delay,” Selassie said.
However, “there is an effect this could have on domestic interest rates”.
His colleagues at the IMF’s fiscal department urged SA to add a debt ceiling to its existing fiscal rule, act more decisively to cut government spending, and bring more urgency to structural reforms to bolster growth.
The government has had an expenditure ceiling in place since 2012, but the Treasury said in February it would implement a new fiscal rule to cement its commitment to a more sustainable public debt level.
IMF fiscal department deputy director Era Dabla-Norris said in a briefing in Washington last week that SA had a good fiscal rule. “Complementing this with an additional target — add for instance a debt ceiling — could be useful. Improving expenditure efficiency through improvements in procurement and public investment management would also help public finances,” she said.
More decisive efforts to cut spending were needed through reducing transfers to state-owned enterprises and rationalising untargeted subsidies while protecting public investment and targeting social assistance to vulnerable groups, she said.
The IMF’s latest reports show SA’s public debt ratio, which is at about 73%, is significantly higher than the 60% median for Sub-Saharan Africa. SA is also well above the regional average for debt servicing costs, which have reached 12% of government revenue across the region, more than double a decade ago, but in SA are now 20%.
However, the fund is quite bullish about the region, which Selassie said was “on the mend” after four challenging years and multiple shocks. It expects Sub-Saharan Africa’s growth to accelerate from 3.4% in 2023 to 3.8% in 2024 and 4% in 2025, with inflation subsiding thanks to decisive action by central banks and fiscal consolidation starting to pay off.
The IMF’s report on Sub-Saharan Africa also said the region was estimated to hold 30% of the world’s critical mineral reserves and was poised to benefit from an expected boom in demand for these minerals. But it urged them to avoid export controls and other regulatory measures such as local content and domestic ownership requirements that deter investment.
Sub-Saharan Africa stands to reap over 10% of the $16-trillion of revenues from the production just of copper, nickel, cobalt and lithium over the next 25 years, the IMF estimated in its report. But it urged countries to pursue “prudent and transparent resource management and strategic fiscal planning” to navigate volatile commodity prices.
It also urged them to do more minerals processing and become more integrated into global value chains. But evidence showed measures such as export controls or domestic ownership or local content requirements could deter investment in processing.
Foreign direct investment could provide much-needed capital, technology and expertise, but from 2016 to 2022 Sub-Saharan Africa attracted only 13% of global greenfields metals and minerals projects, of which only 26% were in processing and manufacturing with the rest in minerals extraction.
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