Mozambique has recently become the latest African nation to reduce the spread between its interest rates and those of U.S. Treasury securities to under a thousand basis points, the threshold often considered indicative of a debt crisis.
The last decade of widespread borrowing, initiated in 2015 and fueled by low-cost loans and expansive fiscal policies, reached a climax during the COVID-19 pandemic. During this time, countries like Zambia, Ghana, Malawi, and Ethiopia defaulted on debt payments, overwhelmed by healthcare expenditures.
However, the economic landscape in Africa has improved post-pandemic, with public debt levels relative to GDP stabilizing around 60%, sustained decreases in inflation, and aid from international financial entities such as the International Monetary Fund (IMF). Thanks to these developments, Zambia and Ghana have managed to restructure their debt and regain access to international markets.
“We are seeing improvements in fundamental indicators across several sub-Saharan African countries, supported by IMF programs as well as some domestically driven reform stories,” said Joseph Cuthbertson, an analyst at PineBridge Investments.
While borrowing costs dropping below 10% is generally seen by governments as a prohibitive level for market access, this does not signify the end of Africa’s debt crisis. For instance, Senegal’s bonds maturing in March 2028 still face a 1,200 basis point spread over U.S. Treasuries, even though the nation’s overall interest rates are below 10%.
This perceived improvement in African countries’ economic and financial metrics, evidenced by reduced interest rates below 10%, makes African debt more attractive to investors seeking refuge from global risks associated with U.S. trade policies.
“With tight credit spreads in emerging markets, it makes sense for investors to seek value in higher-yielding sovereign bonds, such as those in Africa,” stated Samir Gadio, head of Africa strategy at Standard Chartered.
Last week, the IMF highlighted the stabilization of public debt ratios in sub-Saharan Africa despite adverse financial conditions: “Contrary to perception, the region has often managed to stabilize or reduce its debt ratios without restructuring,” IMF economists noted in an analytical paper on Africa’s public debt.
In numerous instances, debt reduction, identified as a decrease over two consecutive years, was significant and persistent. Most episodes saw a reduction of over 10 percentage points of GDP, with nearly half lasting four or more years.
The IMF analysts Athene Laws, Thibault Lemaire, and Nikola Spatafora, in their note, explained that “in an environment of high global uncertainty, tighter global financial conditions, and rising financing costs, concerns about sub-Saharan Africa’s debt vulnerability are growing. However, the region is confronting this issue head-on, with public debt ratios stabilizing on average.”
Regionally, public debt jumped from an average of 37.5% of GDP between 2011 and 2019 to 60.4% in 2023 and has remained around that level thus far.
