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Risk rise for Sub-Saharan bonds

The exchange rate risk of sovereign bonds issued by governments in Sub-Saharan Africa in 2013 and 2014 is threatening losses of US$10.8 billion, a value equivalent 1.1% of the region’s Gross Domestic Product (GDP), according to a new paper launched by leading United Kingdom based think tank the Overseas Development Institute (ODI).

“This is because sovereign bonds are issued and repaid in US dollars but local currencies depreciated significantly in 2014, threatening Sub-Saharan African governments’ ability to repay the bonds to investors, according to Judith Tyson author of the report ‘Sub-Saharan Africa’s International Sovereign Bonds’. Repayments are dependent on continued strong economic growth in Sub-Saharan Africa but growth is now at risk of stalling as export markets slow and commodity prices, especially oil plummet. The irresponsible use of funds by some governments is contributing to the problem. Mozambique borrowed US$ 850 million for their national fishing industry but instead spent the money on military boats and equipment. Ghana has frittered away funds on public sector pay increases. Other countries are simply over borrowing in relation to their Gross Domestic Product. These include the Seychelles, Senegal, Mozambique, and Gabon. “Today’s economic environment in sub-Saharan Africa is similar to the boom that preceded the bust in the debt crises in Africa and Asia in the 90s when western governments and banks wrote off billions of pounds of debt. Today billions of dollars are again at stake, not to mention the financial stability of the region,” said Tyson. The ODI report suggests that governments be held more accountable for the responsible use of funds by national institutions, development agencies and investors so that funds are used wisely to continue Sub-Saharan Africa’s economic boom. It also said that it is in investors’ interests to choose more wisely which countries they lend to and how much to ensure that there are no future defaults. The report suggests that capital controls may be needed to stabilise the region’s financial systems if these actions aren’t taken. Sovereign bonds are a popular way of financing development in emerging economies as investors lend with little conditionality compared to multilateral banks such as the International Monetary Fund (IMF) or the World Bank.

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