African governments warn on local debt controls
As domestic bond issuance rises in Africa, one IMF executive director tells Emerging Markets that sovereigns fear excessive outside control
African states fear increased multilateral efforts to control their local market borrowing activities, Emerging Markets has learned. Peter Gakunu, executive director for 19 African governments at the IMF, said members of his constituency feel their freedom of action is already highly “constrained” by Fund conditionality, and are reluctant to allow further outside influence.
Gakunu told Emerging Markets that the countries he represents had resisted talk of including domestic issuance under the IMF’s debt sustainability analysis, which forms part of the Heavily Indebted Poor Countries (HIPC) initiative.
“If you bring domestic borrowing into the sustainability framework, you close one area of freedom, the only area of freedom that the country has, especially in the context of low-income countries,” Gakunu said.
“Other economies that are more developed can have access to external markets when they like, including the larger emerging markets. They don’t always understand the problems of a country like Kenya or Zambia,” he added.
Domestic market issuance is also a growing focus for the World Bank and International Finance Corporation (IFC), which last month unveiled a $5 billion local markets investment fund, Gemloc. This aims to use the promise of investment as a lever to encourage emerging markets to pursue more investor-friendly policies on elements such as capital controls, regular issuance schedules and taxation of financial transactions.
But Gakunu pointed out that policy choices were not always straightforward for countries with less developed local financial institutions, which were not able to “raise resources at will” on domestic markets.
“If you borrow from your domestic market, your interest rates can be even higher than if you borrow from the external market. So this is a decision that the government has to make – is it cheaper for me to borrow externally, or to borrow domestically.”
And he added that external markets would remain vital, given the massive scale of Africa’s financing needs.
“If you want to fund major projects like Kenya, which has very ambitious plans for infrastructure development, you cannot raise that amount of resources domestically. That is why you see them going out into the external market.”
The lifting of capital controls has also provoked some controversy. Dmitri Savin, emerging market investment analyst for AIG, told a conference last week that some African countries such as Zambia had increased the risk of an exchange rate shock by opening their local bond markets to foreign investors, as large funds can enter and exit quickly.
“This is why Ghana has opted for more limited foreign access to local markets, and used external borrowing instead,” Savin said, referring to Ghana’s ground-breaking $750 million Eurobond issue last month, which was the first by a HIPC country.
Lars Thunell, CEO of the IFC, told Emerging Markets recently that Gemloc was not intended as a heavily prescriptive initiative. The fund is set to invest in the local currency bonds of around 40 emerging markets, including some in sub-Saharan Africa.
Thunell acknowledged that some countries which had liberalized their currency regimes very quickly had experienced “turbulence” in their exchange rates and financial markets. But he added that there were also examples of countries causing severe falls on their stock markets by introducing capital controls.
“We are not saying it has to be this way or that way, there should be transparency and respect. The transition to a full market economy is a challenging one, which is why we need a dialogue,” Thunell said.