14 Comments
Feb 8Liked by Ken Opalo

This is the biggest cope I have read in my entire life. You claim that the international institutions don't let you do developmentalist policy making, but in East Asia most of the public and private investment sector came from domestic savings.

Also the international bond holders wait until WB and IMF's sign off because no one in their right mind will ever trust an African government to not cook the books. The reason the credit rating agencies rate Africa so poorly because your governments are irresponsible. Private international bondholders shouldn't be investing in Africa and I would, personally, advice against doing that.

You can't have this feeling of entitlement for foreign investment. The world doesn't owe you anything. If you want to try some unconventional "developmentalist" idea finance it through domestic investment. If you can't get your own citizens to bet on a project, you can't ask some foreigners to do it for you. If you want a sign off for the IMF and WB you have to do what they say. Again you're not entitled to their money.

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You are right that African sovereigns aren’t entitled to creditors’ money and have to work to convince them to recalibrate their risk perceptions.

It’s not just on CRAs to change their ways. African sovereigns must also reform how they manage their economies in order to reduce real structural risks (budget opacity & unpredictable policies, informality, and commodity dependence).

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Sorry. I should have been mindful of my tone. Long day.

But yes, the largest problem lies with African governments themselves. You can't question a credit rating standard when you have just defaulted. India is challenging the standard because they have never defaulted since independence and relatively transparent financial institutions.

As for Africa currently they should focus on energy and food independence so that they don't have this tendency to overvalue their currencies during a commodity bust. They should build a sovereign wealth fund to protect against swings in commodity prices. This has come before industrialisation. Basic stabilisation policies. I know a lot of African countries already have a sovereign wealth fund which politicians have used as personal ATMs. For that they do what another developing country (I think it's papa new Guinea) that found oil did. They let the Singaporeans to run their SWFs and set hard limits on drawing from the fund. But again, this would require African countries to ceede some of their sovereignty in order to make progress.

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Lots of African countries with junk status ratings have never defaulted and have reasonably low debt/GDP ratios.

Critics of CRAs have a point in stating that lots of people tend to think of the entire place as one country and therefore force correlations in ratings even where they shouldn’t exist.

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Fair enough. What some countries in Africa that have never defaulted?

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Well I think this questions sums the levels of this discourse. @Nadim Why would you have such strong views on an entire continent without any background research and actually make an attempt to tear down such a great piece without having facts on your side. While major economies in South America and Asia have defaulted, resulting in regional and on some occasions global contagion, the lense seem to shift significantly when Africa comes to view. Yet far less economies with significant systematic risks in Africa have actually defaulted. Ken I applaud you for patience with which you have handled this.

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Has there ever been any history of PFI type arrangements when it comes to infrastructure projects in Africa? While they have a bad reputation here in the UK, reading through this makes me wonder if they could be a better way of using debt to finance projects. The key reason why they are criticised in the UK is that they are essentially government borrowing in a less efficient way - the UK is well trusted and has little corruption, so functionally there’s no difference between the UK government borrowing money through bonds and using it to pay for infrastructure etc, and the UK getting the private sector to build it and paying them back over time. At that point, given government borrowing costs are typically lower than the rates demanded for PFI, there’s little reason for the UK to use it, save for keeping borrowing off of balance sheets (which didn’t work).

However, given African borrowing costs are much higher and corruption is much more of a problem, there could be an argument for an arrangement in which private sector enterprises build the infrastructure first, avoiding having the money siphoned off by corrupt officials, and then the government pays them back over the long term. This would hopefully deal with some of the elements of risk associated with trusting the government to spend the money effectively, and would enable government repayment to benefit from the economic boon of whatever was constructed. Throw in a way for the relevant private sector enterprise to make a small amount of money from running it (eg including small tolls on motorways), and it seems like this would be a far easier sell as a form of borrowing than bond financed debt. Intrigued to hear people’s thoughts?

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Several African countries have done PPP/PFI projects. The challenge, however, is that the risk profile of these kinds often raise the cost of the private firms’ borrowing. Which is why projects have only succeeded when backed by the firms’ home governments (China, France) or the AfDB or the Bank.

Another challenge is that these sorts of investments limit the multiplier effects of borrowed money. Consider a PPP project with a Chinese contractor borrowing from Chinese banks then importing Chinese engineers and materials to build a road in Uganda — in the end, Uganda gets the road, but misses out on the full potential economic impact of investing in road since a good chunk of the borrowed money never leaves China (while Uganda then has to use its forex to pay the Chinese firm over time).

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When it comes to large, complex infrastructure I can definitely see the points you raise, but I’d be intrigued to know if that still applies for smaller projects? Particularly if you have situations where private firms stand to gain from said projects (eg a cocoa bean processing business investing in a road between the plant and a port) it seems like risk premiums would be lower given they will benefit regardless, multiplier effects should still be in place (given for most non-Chinese firms it presumably just makes more sense to use local labour etc) and forex should be unnecessary (as given they are operating in said market they would themselves have a use for local currency)?

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The biggest challenge to this model is the habit of governments accumulating huge sums of pending bills (a critical component of budget opacity problems throughout the region).

This is partially why I don’t think it’s enough to tackle the problems related to CRAs. African governments also must become more prudent in their PFM practices.

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100% agreed. In the meantime though, this could also be a potential argument for devolution of budgets, as it would likely be easier to manage such liabilities on a smaller balance sheet, rather than trying to condense everything together and risk much larger mistakes being made.

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Beside the multiplier effect mentioned by the author (there is a tradeoff between efficiency and spillovers, but thst does not mean spillovers are worthless), I'd note that even first world states don't have a great track record as customers. Lending money to the Uncle Sam is much safer than being a contractor for the Navy, whether on credit or not.

You can safely expect all European governments to honor their bonds, one way or another, but many of these governments are terrible at respecting contractual obligations, stay insolvent for far longer than the average debtor (since litigation is almost costless for them), and impose vexatory clauses in a dishonest way.

It might be that for developing countries the inverse is true (contract obligations are honored more reliably than debt, and they are generally better customers than debtors), but if not, anybody wary to lend money to a govt should be much warier to provide them goods or services

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Great read. Timely as well, with my home country Kenya opening a new bond buyback offer today.

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Thanks again!

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