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Western debt crises may tempt Africa to backslide
The debt crises in Europe and the United States could tempt African countries to throw fiscal caution to the wind, threatening hard-won economic gains just as commodity prices tilt lower and cheap borrowing becomes scarce.
Some on the continent are already turning elsewhere for credit, notably to China. But analysts warn such “south-south” tie-ups still cannot replace traditional sources of funding and are not as attractive as they first seem.
“It may be used as a pretext by African governments to not consolidate public finances,” Standard Bank strategist Samir Gadio said of the debt dilema facing Western states used to preaching budget austerity to their African counterparts.
“But just because the U.S. and euro zone have these debt issues, does not mean African countries should do the same, African budgets could be adversely affected by a downturn because they depend on high prices for commodities, like oil.”
Fears of yet more havoc from the euro zone’s debt crisis and of a possible U.S. recession combined this week to wipe $2.5 trillion of the value of world stocks as markets contemplated the prospect of a new global slowdown.
The chill comes just as Africa, had pulled its growth levels back to those seen before the 2008/09 turndown and was looking forward to a healthy rise of nearly six percent in its output in 2012.
While Afro-optimists insist the continent’s long-term fundamentals are still promising, the turn in world markets over the past few days suggests some rocky months ahead as key commodities begin a retreat from their relative highs.
Oil, the core of Africa’s number two and three economies Nigeria and Angola and the foundation of new-producer Ghana’s hopes for a better future, saw a sell-off that was only halted by reports of an oil pipeline explosion in Iran.
Copper prices fell to their lowest point in over a month on Friday, a dampener for producers such as the Democratic Republic of Congo, whose miners are aiming to ramp up output of the metal by 25 percent to one million tonnes this year.
Still No Free Money
The last thing African governments need right now is a hit to revenues from their most valuable resources, particularly as many have yet to straighten out their public finances.
Ivory Coast, whose recovery from this year’s brush with civil war relies partly on steady revenues from cocoa and oil, has announced that it does not have the means to pay back any defaulted debt until at least next year.
Neighbouring Ghana, whose government spent the first half of its term dealing with the debt legacy left by the previous administration, revised its 2011 deficit target last month up to 5.1 percent of GDP from 4.1 percent, a level the market can live with unless it slips further before a 2012 election.
Nigeria’s revised 2011 budget keeps it just within a three percent deficit target only after President Goodluck Jonathan negotiated down higher spending sought by parliament.
The International Monetary Fund (IMF) labels Ivory Coast’s debt default a “consolidation measure” justified by the imperative of getting its shattered economy straight. The current Fund mood was understanding of such difficulties.
Congo itself goes further, arguing the West’s debt crises vindicate its move to defy initial IMF concerns and sign a 2010 deal for $6 billion of funding from China, suggesting the pact opens up a new realm of credit vistas.
“We do not rejoice at the debt crisis hitting Europe and the United States, you can never rejoice at the woes of a partner,” Information Minister Lambert Mende said.
“But I note that we were right to diversify our partners,” he told reporters.
Others are less sure, noting the impressive headline figures of China’s funding deals in Africa often mask more modest agreements and that any actual borrowing comes at the cost of sharing project proceeds with Chinese firms.
While full details have not been released, Chinese firms are to share the profits and operation of mine and infrastructure projects financed by a $5 billion loan by China’s Eximbank.
A $13 billion pact signed between China and Ghana last September later emerged as the theoretical limit of a credit line allowing Accra could draw funds for specific projects. As of April it had drawn less than $3 billion for roadbuilding.
“The Western debt crisis will reinforce South-South engagement,” said Razia Khan of Standard Chartered. “But there isn’t going to be any free money in this capital-scarce world.”
Source: Reuters