We are entering what seems to be a synchronised interest rate cutting cycle over the next year, except for China and Norway, which out of 19 countries are the only ones expected to hike rates.
Experience over the past decade — when quantitative easing was in full force, and interest rates at the zero or lower zone in major economies — is that many countries, especially emerging markets, went on a borrowing spree in hard currency. When the US Federal Reserve signalled and eventually started to raise rates, debt servicing costs started to choke economic growth.
Sub-Saharan African countries’ love for debt was made clear at the recent Open Society Initiative of Southern Africa (Osisa) debt conference, as was the fact that the consequences when conditions become unfavourable are dire.
As many as 40% of the countries in question are in danger of experiencing debt crises; eight countries, including Mozambique and Zimbabwe, are already in debt distress; and 18 countries have surpassed a 55% debt-to-GDP ratio. In SA the debt ratio has more than doubled to about 63% if we include Eskom’s government-guaranteed debt.
The problem is that many of these countries have nothing to show in terms of infrastructure built using this debt, although the infrastructure need remains glaring and restricts economic growth, job creation and poverty reduction. My fear is that with the expected interest rate cuts and easing financial conditions across the developed world, the burden of servicing debt will likely moderate, leading to complacency in tackling the apparent debt crisis.
My fear was sparked following a panel discussion on the role of public-private partnerships (PPPs) in infrastructure investment in the region. On the panel were representatives of the World Bank, the Trade Collective, the African Forum and the Network on Debt and Development. Apart from the World Bank representative and the moderator, who both clearly articulated a role for PPPs, the other contributors all but demonised PPPs, saying they are exploitative of governments and communities and extract superprofits while taking on little of the risk.
I couldn’t help but wonder why governments enter into these partnerships if they are so bad for the fiscus and communities. One reason the panel agreed on was the need for skills and expertise in project planning and execution. The obvious reason that governments have overborrowed, misused funds, have not built the infrastructure and therefore required private sector funding, was only discussed in passing. Yet had governments used the funds appropriately by prioritising those projects that have the most impact on output and high job multipliers, it can be argued that private sector funding requirements would be far less given the extent of the debt accumulated over the past decade.
A fact that can’t be wished away is that public sector funds are as limited as the funding requirements for infrastructure are significant. Demonising private capital will not help the development and jobs agenda. I would have expected discussions that diagnose where PPPs aren’t working to come up with solutions to make them work, instead of merely saying they deplete government resources at the expense of the people.
Project identification is the responsibility of governments. The setting up of the regulatory framework and risk- and profit-sharing mechanism is largely the responsibility of governments through whichever implementing agency. It cannot, therefore, be constructive for the part that has the power to enact laws and was an active participant in drafting the terms and conditions for these PPPs to cry foul when those terms disadvantage the state. In SA, renewable energy projects are a case in point.
As far as advancing the growth agenda is concerned, the debate must shift from ideology to pragmatism and ruthless implementation. One such pragmatic decision will be for countries whose debt is entering unsustainable territory to take advantage of the coming lower debt servicing costs to consolidate and free up space to undertake infrastructure build. PPPs have an important role to play. What is required is to customise models from other countries to suit local conditions.
• Mhlanga is executive chief economist at Alexander Forbes.
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