2018 - 2019 Edition of Citi Perspectives for the Public Sector

52 Africa Debt: Distress Déjà vu or Development Driver? regional capital. In 2012, the regional agency UMOA-Titres was established by the Central Bank of West African States to help West African economies leverage domestic capital markets to finance development. Although less mature, some African stock markets are starting to take off. Market capitalization in Sub-Saharan Africa has grown by almost twenty-six times over the past two decades, reaching to $603.2 billion compared to a modest $23.6 billion in 1996. 15 Institutional and capacity building to manage sovereign debt has been expanding in the region and is only becoming stronger as countries seek to properly address their challenges. Enhancing economic resilience and developing the required and responsible capabilities of countries allows African governments to best utilize available tools and strategies to achieve debt sustainability and reduce debt distress. Focus on mitigation and mobilization The key driver of debt sustainability in Africa is debt servicing capacity supported by internally generated resources, i.e., countries must live within their means. Governments need to focus on reducing the overall costs of servicing and repaying debt while increasing the level of internally generated resources. Sub-Saharan Africa’s median debt-to-revenue stood at 195% in 2017, compared to 422% in 1996. 16 External debt service costs as a percentage of revenue have reduced from a median of 17% in 1996 to 7% in 2016. 16 While these ratios are far from the crisis levels observed two decades ago, they have grown at a much faster pace than the debt-to-GDP ratio over the past ten years. Interest costs in Africa have doubled over the past decade, taking up more than 20% of tax revenues. 17 Mitigation: As previously mentioned. African governments have increasingly demonstrated a track record, willingness and ability to implement responsible finance practices and appropriate strategies to mitigate the risks inherent in their debt portfolios that can increase the servicing costs. There is a wealth of solutions that can support their efforts in maintaining debt sustainability through focusing on their debt servicing capacity. Mitigating currency risk — Most African sovereigns have accumulated foreign-currency debts. Hedging against foreign exchange volatility will act as an insurance policy to protect governments from higher interest and principle payments due to local currency depreciation. In many cases, cash flow for foreign currency debt repayment is generated from local currency sources, including local assets such as power generation. The currency mismatch between assets and liabilities can be exacerbated as local currencies depreciate against hard currencies, reducing sovereigns’ ability to withstand volatile capital flows Debt servicing costs, although lower than the mid 1990s levels, have been rising rapidly Sub-Saharan Africa external debt service costs as a % of revenue (1996-2017) 16 25% 22% 16% 13% 12% 18% 17% 13% 5% 3% 5% 7% 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Average Median 15 Factset 16 AfDB data 17 IMF/World Bank: https://www.ft.com/content/baf01b06-4329-11e8-803a-295c97e6fd0b