African spending spree faces punishment by markets

An Economist, Razia Khan

African economies are securing new funds through resource finds or dollar bonds but many governments face questions over how they use the money and risk being punished by international capital markets.
The dash to build infrastructure, and pressure from citizens for swift rewards from oil and gas discoveries, have pushed some governments to loosen policy. That has led to ballooning current account deficits, rising debt and fiscal shortfalls that threaten to take the shine off otherwise positive growth stories.
Resource-reliant Ghana and Zambia show how star economic performers can quickly face the heat. Ghana's cedi and Zambia's kwacha have hit record lows against the dollar this year as rising spending has strained state finances.
"It's as if we haven't learnt anything about macroeconomic management," said Mthuli Ncube, chief economist at the African Development Bank (AfDB), echoing other delegates at the bank's annual meeting in Rwanda this week.
"The macro-policies are out of line, whether you are looking at budget deficits, current account positions, the debt positions and so forth," he said.
Africa is the fastest-growing continent after Asia but it has a long way to go before its roads, railways, schools or hospitals match infrastructure in other economies.
As rapid economic growth cuts donor aid as a proportion of gross domestic product, governments have turned to international markets to finance capital or other spending, but their credibility among investors could quickly crumble if fiscal discipline is not instilled.
"Initially, part of the investor appetite for sub-Saharan African sovereign debt was due to the fact that there was relatively little issuance, and that investors were becoming more attuned to the 'Africa Rising' story," said Razia Khan, head of research for Africa at Standard Chartered bank in London.
"But this risks being eclipsed by the reality of fiscal management shortcomings," she said.
Ghana, which began oil exports in 2010 and saw economic growth of 7.1 percent last year, paid a premium for its Eurobond issued in July worth $750 million because of worries about its fiscal and current account deficit.
BALANCING ACT
Ghana's yield of 8 percent compared with 6.875 percent on a $400 million bond issue in April by Rwanda, a state with few resources but a better reputation for public financial management.
Ghana's public debt is now just over half of gross domestic product, up from 43 percent three years ago and 32 percent in 2008.
Zambia, Africa's biggest copper producer, is growing by about 6 percent annually. But with an ambitious plan to upgrade its road network and other infrastructure, it was downgraded by Fitch as the budget deficit widened to 6.7 percent of GDP last year and the current account deficit hit 12 percent.
The International Monetary Fund urged Ghana and Zambia last month to rein in their deficits to help deal with any shocks, as developed nations scale back economic stimulus that had encouraged investors to turn to Africa for higher yields.
"The Zambian economy is bright and it is going in the right direction," Zambian Finance Minister Alexander Chikwandahe told Reuters in response to criticism of his country's policies. "Is there any economy that does not have any challenges?"
Pressure on Zambia's kwacha in response to its ambitious spending plans underline the balancing act African nations face in managing resource revenues while modernising their economies.
Botswana, a diamond-producer which has forecast a slender budget surplus in fiscal 2014/15, is often held up as an example of a nation that has managed resource wealth well.
Oil producers such as Angola and Nigeria are setting up sovereign wealth funds to preserve their resource revenues for the future. Investors often complain Nigeria has squandered its oil windfall. Other countries with new hydrocarbon discoveries, like Kenya and Tanzania, are also considering setting up such funds.
"Laws on managing revenue from resources have to be in place before you start exploiting them," Kenyan Finance Minister Henry Rotich said during the AfDB meeting, adding that Kenya was enacting measures to prevent petroleum revenues being used for items such as public sector wages.
Kenya is planning a debut Eurobond issue this year, which will put close scrutiny on its spending plans.
"Market access for any sovereign seen to have mismanaged its fiscal affairs might alter quite dramatically," said Standard Chartered's Khan.