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UN agency warns against African Eurobonds

Economists are worried that high yields on new borrowing by developing countries are unsustainable

Several African states may have returned to the Eurobond market in recent months, but a new report by the United Nations Conference on Trade and Development (UNCTAD) has warned that the gap in borrowing costs between developing countries and wealthy states continues to widen.

'The debt and development crises faced by many developing countries continues to worsen,' said UNCTAD in its April Trade and Development report.

'The increase in public resources and export revenues that must be channelled towards public and publicly guaranteed debt service is a key dimension of the current crisis.'

Benin, Côte d'Ivoire and Kenya have tapped the Eurobond market this year. Though Kenya's $1.5 billion in new debt which matures in 2031 was the most expensive, President William Ruto's government has seen obvious benefits from going to market: its currency has strengthened by more than 15% against the dollar since issuing the bond in February (AC Vol 65 No 4, Ruto gambles on Eurobonds). Kenya is also set to receive additional funding from the World Bank and International Monetary Fund in the coming months.

Kenya's interest rate of 10.375% is significantly higher than the yields on Côte d'Ivoire's two Eurobonds issued last month, worth $2.6bn, at 7.875% and 8.5%, which mature in 2033 and 2037 respectively. Benin's debt comes at an 8.375% interest rate and matures in 2038. In all cases, the yields are above the 7% baseline figure that economists cite as the highest at which borrowing is sustainable.

Even so, the successful returns to market had been cited as evidence that widespread African debt distress, and the default of Ghana, Zambia and Ethiopia, which followed the Covid-19 pandemic was a thing of the past.

In Kenya's case, economists have warned that the boost to economic confidence will be short-lived unless growth and tax revenue collection significantly exceed expectations to ease debt-servicing pressures.

Pointing to the recent Eurobond issues, UNCTAD noted that 'Implicit borrowing costs, gauged by yields, are substantially above existing borrowing costs, as measured by the average weight of existing bond coupons.'

'Countries capable of issuing bonds do so at higher coupon rates, compared with bonds being currently repaid. This has detrimental effects on debt dynamics, especially in a context of low economic growth, and more broadly on the allocation of public spending.'

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