With the non-payment of bond coupons for 42.5 million dollars, on November 13 the Republic of Zambia became the first African country to declare sovereign bankruptcy (default) since the beginning of the Covid-19 pandemic. Zambia is certainly not the only country in the world to have fallen into the economic and social abyss of default sovereign in this terrible 2020, but for now he is in the company of 5 other countries (Argentina, Belize, Ecuador, Lebanon and Suriname) that have suffered the same fate since the beginning of the year.
The Italian mass media should be acknowledged for having paid a minimum of attention to the Argentine situation (given the enormous and eternal scope of the problem, as well as to the historical and cultural ties that bind that country to ours) as well as to the Lebanese situation (given the consequences geopolitics in the Mediterranean and the Near East) while there was hardly any attention regarding the other 4 cases, except in highly specialized publications in international finance.
This distraction can be forgiven in the cases of Belize, Ecuador and Suriname. In fact, given that the 3 Caribbean and South American countries are relatively small and underdeveloped, and have very little international trade, it can certainly be said that the economic-financial disaster of these 3 countries has an absolutely insignificant impact on the rest of the world.
At first superficial analysis the same thing could be said of Zambia. However, the writer is convinced that the case of the African country should be observed with more attention by all lovers of geopolitics, since the economic problems of Zambia are contextualized within some historical, political, economic and financial trends that affect the whole continent. black. Consequently, the case of Zambia may be just the tip of the iceberg in a chain of further default Africans that could have significant effects for the whole world.
Therefore, to allow the reader to understand the problem in more detail, it is necessary to take a step back and summarize the salient events in the history of Africa starting from the Second World War that have led us to the current situation.
In the aftermath of the Second World War, the birth of the UN and the advent of the "cold war" between the United States and the Soviet Union gave a very strong acceleration to the decolonization process that led to the independence of all those African territories that had been colonies of old European powers now in decline such as the United Kingdom, France, Belgium and Italy. Consequently, in the years between 1957 and 1965 the vast majority of the countries of sub-Saharan Africa obtained their independence (only a small number of countries, such as the former Portuguese colonies of Angola and Mozambique, obtained it with a few years late).
All the new African states, once freedom from the colonial yoke had been obtained and celebrated, immediately found themselves facing a series of very difficult problems to solve. The sum total of all the causes that led to the chronic underdevelopment of almost all independent African countries is such a vast subject that it would require a separate discussion. It is sufficient to recall here some common elements, including the lack of internal cohesion between the ethnic groups of each country (also due to the total arbitrariness of international borders), as well as the total absence of a balanced economic fabric (given that the economy of a colony typically revolved around the production of a single good) to understand why in the space of a few years after independence in almost all countries of sub-Saharan Africa there were alternating disorders, oppressions, coups and / or military dictatorships. Colonial-era infrastructure deteriorated and economies could not develop.
One of the main consequences of all this was the constant increase in public debt in almost all the countries of sub-Saharan Africa throughout the period of the sixties, seventies and eighties. With the public debt, the political, economic and military oligarchies of the various countries financed not only the purchase of basic necessities that could not be produced internally, but also the repressive apparatus of the state and the private enrichment of those who held the power.
This public debt was mainly contracted in the form of loans from international institutions, primarily the World Bank, the International Monetary Fund and the African Development Bank; but also in the form of bilateral loans obtained directly from other sovereign countries. Often and willingly, the country that (in exchange for political and economic counterparts) lent money to the African country in difficulty was none other than the former colonial power, to the point that people started talking about "neocolonialism".
As already mentioned, the economies of African countries in those decades were based by colonial heritage on the export of a narrow range of raw materials (hydrocarbons, industrial and precious metals, agricultural products) while almost every type of basic necessity had to be imported. for the survival of the population. Consequently, the persistent decline in the prices of the main raw materials (starting with oil) throughout the XNUMXs and the first half of the XNUMXs dealt the coup de grace to the economy of many African states, making their financial situation unsustainable.
In the early XNUMXs it became clear that African public debt had become unmanageable and something needed to be done to relieve the black continent of this burden.
Pope John Paul II published the apostolic letter on November 10, 1994 Tertio Millennio Adveniente, in which he exhorted Christians, in preparation for the Jubilee of 2000, a "To be the voice of all the poor of the world, proposing the Jubilee as an opportune time to think, among other things, of a substantial reduction, if not total forgiveness, of the international debt, which weighs on the destiny of many nations".
On a musical level, several singers (from Bono to Jovanotti) decided to support and promote the cause. Countless associations and non-governmental organizations across the West did the same.
The response of the institutions took shape starting in 1996, the year in which the International Monetary Fund and the World Bank promoted the joint program Heavily Indebted Poor Countries (HIPC) which had the aim of reducing and / or canceling the public debt of the poorest countries in the world in full in exchange for reforms to be implemented to increase the efficiency of initiatives aimed at reducing poverty.
In the context of the nineties, characterized by the absence of serious international tensions (especially in comparison with today's world) and by a zenith of well-being and prosperity widespread in all industrialized countries, this program was positively received all over the world. The only criticisms from Western public opinion did not concern the excessive generosity of the program, but, if anything, the access conditions imposed on poor countries, judged by some to be too restrictive.
It can certainly be argued that this campaign to cancel the debt of poor countries (mainly African countries) has been successful: by 2005 as many as 27 countries (of which 23 in sub-Saharan Africa, including Zambia) received aid for a total of 54 billion dollars (40 billion the portion went to 23 African countries).
Specifically (HIPC data) at the end of 1999 Zambia had a public debt towards foreign countries equal to 6.5 billion dollars (equivalent to 160% of GDP at the time), 53% towards international institutions (such as the World Bank and International Monetary Fund); 46% towards other sovereign countries (almost entirely towards countries belonging to the Paris Club); for the remaining 1% to international credit institutions. Under the HIPC program, the three types of creditors granted aid totaling $ 2.5 billion to Zambia, each creditor in proportion to its share.
This aid was given in 2000 in exchange for a commitment by the Zambian government to improve the education system, to implement more efficient programs to fight HIV / AIDS and malaria, as well as to launch a major infrastructure campaign aimed at bringing electricity and clean water. in every corner of the country.
Starting in the earliest years of the new millennium, a combination of favorable factors, including the completion of debt relief programs, the reforms required in exchange for participation in such programs, and a new cycle of rising prices for exported commodities from African countries, has led many sub-Saharan African countries to experience, perhaps for the first time since independence, a season of sustained and convincing economic growth, as well as a generalized improvement of all social indicators.
As the icing on the cake, over the 2000s there was a return of public debt to more than sustainable levels almost everywhere in Africa (in the case of Zambia, the debt fell to 20% of GDP in 2010). The quasi is a non-accidental reference to Zimbabwe: a country ruled in a totalitarian way since 1980 by his father-master Robert Mugabe, who has imposed on all his fellow citizens a devastating management of the economy, which in the space of a quarter of a century has transformed the granary of Africa in a veritable hell of repression, confiscation of assets, devaluation, hyperinflation, HIV / AIDS and cholera (and obviously never participated in the HIPC program).
In the other countries of sub-Saharan Africa, on the other hand, the new season of economic and social growth of the 2000s, compared both to what happened from independence until the moment of debt cancellation, and to what was happening in neighboring Zimbabwe, represented a lesson from history that in the years around 2010 all the leaders of African countries should have studied and remembered to give their respective countries a real chance to continue the long march towards development and prosperity that has just begun.
And instead that of the debt of African countries turned out to be a history that has taught nothing. To understand why, it is necessary to make a second excursus, this time to describe how the international capital flows have evolved since the financial crisis of 2008.
Unlike other financial crises of the past, which had started from "peripheral" and "fragile" places of the global economy (just to give 3 examples: the Mexican crisis of 1994, the crisis of the "Asian tigers" in 1998, the crisis turkish of 2001), the great financial crisis of 2008 had as its double epicenter the nerve centers of all world finance: the City in London and Wall Street in New York.
It is enough to look at the peak of the unemployment rate recorded in the various countries in the first months of 2009 to realize how the crisis that exploded in London and New York completely overwhelmed the British and American economies, while the economies of the other advanced countries ( such as Canada, continental Europe, Japan and Australia) have felt the blow a little more softly, China even more lightly, while the other countries of the world (including African countries) they suffered this crisis in a very marginal way.
Starting from September 2008, the orientation that the American Federal Reserve led by Ben Bernanke took to get out of the crisis was to inject a huge river of money into the financial system (the famous Quantitative Easing, also implemented a few years later by Mario Draghi's European Central Bank). This river of money was immediately made available by banks to large international investors, who, rather than using it in "advanced" countries such as the United States, Europe or Japan (where yields were low and economic prospects uncertain), preferred use it in that "rest of the world" where the economy had remained solid and mostly yields were even higher.
All those countries of the world that we had always called with contempt "Third World" suddenly became "Emerging Markets", losing all negative connotations. The acronym "BRIC" (coined a few years earlier to indicate the 4 great protagonists among the Emerging Countries, namely Brazil, Russia, India and China) on the wave of the very strong financial interest acquired substance in 2009 with the first formal summit among the heads of government of the 4 countries. In 2010 it was changed to "BRICS" to include South Africa. Also in 2010, the acronym "CIVETS" was proposed to indicate the "second band" of emerging regional powers that would become "sexy" in the eyes of international investors as soon as investments in "BRICs" became "banal" (in order : Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa itself). A multitude of similar acronyms flourished in the following months and years, including the most disparate Latin American, East European, Middle Eastern, African and Asian countries.
Capitalism is made in such a way that where there is demand, soon there is also supply. Therefore, this sudden and overwhelming financial interest in emerging countries triggered, in the five-year period 2009-2013 included, a flurry of new bond issues from Latin America to Asia passing through the Middle East and Eastern Europe, with yields gradually lower than, however, international investors enthusiastically accepted because they were still more attractive than what was offered in the old advanced economies, which are still in crisis (think of America still shaken by subprime mortgages, Europe overwhelmed by the Greek crisis or Japan overwhelmed by radiation of Fukushima).
In the first half of this five-year period (ie until 2011) this phenomenon had only touched Africa. Until 2007, the only countries that had issued bonds in dollars or euros that could be purchased by international investors were those located at the 4 ends of the black continent: South Africa, Egypt, Tunisia and Morocco. In 2007, Ghana was added (the first and only sub-Saharan country to have issued a bond in US dollars). With regard to all the other sub-Saharan countries, it was desirable to think that the historical lessons described above were sufficient to dissuade the leaders of the black continent from falling back into the foreign debt trap.
However, the easy money outlook has evidently been stronger than any historical lesson, as after Ghana the list of African countries that debuted on the global bond scene with government bond issuance has lengthened to include (in September 2012 ) Gabon, Senegal, the Ivory Coast, the Republic of Congo (Brazzaville), Nigeria and Namibia.
And here is that on September 14, 2012, our Zambia is added to this list, which makes its entry into world finance with the bond issue of a 750 million US dollar government bond that that day generated among global investors a demand for the fantastic figure of 11.9 billion dollars, or 15 times the offer (Bloomberg data). It is inevitable to add: a request equal to almost double the total foreign debt which was unsustainable and therefore canceled just 12 years earlier.
This ten-year bond would have paid a fixed coupon equal to 5.375% per annum, paid every six months every 13 September and every 13 March until the day of the redemption of the bond, scheduled for 13 September 2022. As already written at the beginning of this analysis, the non-payment of the coupon of 13 September 2020 led the country to default on 13 November, once the 60-day "grace period" has ended.
The writer on that 14 September 2012 was practicing as a financial consultant in a bank in Dubai (one of the "financial capitals" of emerging markets), and here feels the need to open a little personal parenthesis to share with the readers of Defense Online what he felt "stung" in his patriotic pride that day, not being able to help but notice that the aforementioned stock "Republic of Zambia 5.375% 2022" debuted on the markets with a lower spread than that of comparable BTPs of the Italian state! Now, agree with the political and financial difficulties of Italy that began in that terrible autumn 2011 and rectified only by the famous “whatever it takes” by Mario Draghi a year later, but considering Zambia less risky than Italy was definitely not there. On 13 November, history decreed which of the 2 countries ultimately failed first. Closed parenthesis.
Zambia was certainly not the last country in sub-Saharan Africa to get into debt in the international financial markets: for example in the following two years (i.e. until April 2014) Angola, Mozambique, Rwanda and Tanzania. Others were added later, up to a total of 21 African countries that to date have contracted debt in the form of government bonds (all the countries already mentioned plus Kenya, Benin, Ethiopia, the Seychelles and Cameroon).
If you visualize these 21 countries on the map of Africa, it immediately catches the eye for geographic dimensions and central position in the black continent which is the last taboo still inviolate of the international finance towards Africa: the Democratic Republic of the Congo ( Kinshasa). This immense country, in fact, is characterized by state institutions that are so weak, dysfunctional and unreliable, as well as by such basic infrastructural deficiencies that no private investor is yet willing to become a creditor. Consequently, Congo (Kinshasa) is certainly one of the poorest and most underdeveloped countries on the planet, but it is also one of the by now very rare countries on the face of the earth to have a total debt level of less than 15% of GDP and public accounts in perfect balanced budget (2019 data).
Starting from spring 2014, the interest of international investors in the debt of emerging countries began to wane, partly due to the improved economic prospects in advanced countries, partly due to some negative events in the emerging countries themselves. starting from the BRICs (such as the looming "Lava Jato" scandal in Brazil or the Russian annexation of Crimea and related international sanctions), partly to start a new cycle of lowering the price of oil and other commodities on which the emerging economies (especially the African ones) are based.
As we have already seen, these factors have by no means prevented an increasing number of African countries from borrowing on international bond markets, nor have they prevented already indebted countries from issuing further debt securities (for example, Zambia after issuing the bond of 750 million dollars in 2012 issued a second in 2014 and a third in 2015, reaching a total debt towards the bond markets of 3 billion dollars). However, they have triggered a vicious circle of ever higher spreads, higher charges in terms of interest payable and greater total debt both in absolute terms and in relation to GDP.
In the case of Zambia, this vicious circle broke on November 13 with a total debt of $ 18.5 billion, and a debt-to-GDP ratio that exploded from about 20% 10 years ago to the current level of 120% of GDP.
Considering the chronic internal instability of almost all sub-Saharan African countries, it is now too early to make predictions as to which African country will be next on the list to find itself in default (Angola, with a public debt also at 120% of GDP, is a more than eligible candidate) both with regard to the political, economic and social consequences of default in Zambia (the specter of Zimbabwe hovers just beyond the stunning Victoria Falls).
However, it is beyond dispute that the exit from the current cycle of indebtedness will be much more painful for all Sub-Saharan African countries than that which ended thanks to the HIPC program, for all the reasons listed below:
- The current composition of creditors is very different from that of the 10s. Then, as already mentioned, the creditors were either international institutions (such as the World Bank or the International Monetary Fund), or other sovereign countries (often the former colonial power). Today, broadly speaking, the poorest countries in Africa owe a quarter of their debt to bondholders and other private creditors; a quarter to China (which over the last XNUMX years has used many resources to increase its influence on the black continent, even to the detriment of the old European powers); a quarter to other sovereign countries and a quarter to international institutions
- Negotiating a debt restructuring with a myriad of private bondholders in the midst of a global Covid-19 pandemic crisis is a far more daunting business than getting debt relief from international institutions with the auspices of Pope John Paul II and the blessing. a large part of Western public opinion
- Negotiating a debt restructuring with China (which is not a member of the Paris Club) could prove to be much more difficult than with all those old powers with a colonial past to be forgiven
- The prospects for the price trend of oil and other raw materials (which at the end of the fair have determined the good and bad weather of all African economies for 60 years) now appear much weaker than those of the nineties, given that growth expectations of the world economy are certainly more modest than they were then.
As they say in London and New York, “stay tuned and watch this space” (stay connected and keep an eye on the matter). An issue that does not bode well, given that the debt of African countries is a story that (for now) has taught nothing.
Paul Silvagni
(Economics graduate, former financial advisor, entrepreneur)
Photo: web / The National Archives UK
