🔅 The African Debt Bomb: How Credit Ratings Backfired
President Tinubu's Plea & Tragedy in Mogadishu
Image of the Day
Market Mondays
Year-to-Date Performance:
🟢 Johannesburg SE: 80,538.57 (+4.74%)
🟢 Nigerian SE: 97,745.73 (+30.72%)
🟢 Nairobi SE: 103.26 (+12.11%)
🟢 Ghana SE: 4,586.28 (+46.52%)
🟢 US S&P 500: 5,346.56 (+12.73%)
🔴 Shanghai Composite: 2,905.34 (-1.92%)
🇺🇸 Investor sentiment in the US took a hit this week thanks to a double whammy. First, some of the "Magnificent 7" companies delivered lackluster quarterly reports. Then, the plot around monetary policy took a dramatic twist. Traders who were once confident in the Fed's soft landing are now fretting that the aggressive tightening might have backfired, slowing the economy down too much and pushing it into recession.Meanwhile, African treasury departments are hitting the pause button on sovereign debt sales as they wait with bated breath to see if Trump or Biden will emerge victorious in the nail-biter of a U.S. presidential election. With the outcome still up in the air and U.S. interest rates refusing to budge, nations are rethinking their plans to tap the market.
🇧🇼 Debswana Diamond Company, the gem of a joint venture between the Botswana government and De Beers, reported a staggering 49.2% drop in rough diamond sales for the first half of 2024. The global diamond market continues to lose its shine.
🌍 Geopolitical tensions have been giving African currencies and inflation a run for their money, so countries from Zimbabwe to Nigeria are taking matters into their own hands by stockpiling gold. The goal? To diversify reserves and reduce dependency on the U.S. dollar.
🇪🇹 The World Bank has thrown Ethiopia a much-needed $1.5 billion lifeline in the form of its first-ever budget support lending. As the east African nation navigates the treacherous waters of debt restructuring, this financing comes as a welcome relief, especially in the wake of securing a $3.4 billion program from the IMF and floating its currency. Meanwhile, Ethiopian Airlines is soaring to new heights, posting an impressive $7 billion in revenue for the 2023/24 financial year—a cool $900 million more than the previous year. The state-owned carrier's success is largely attributed to an increase in passenger numbers, proving that people are ready to take to the skies once again.
🇨🇲 Cameroon has set its sights on becoming an upper middle-income country by 2035, and it's betting big on bauxite to get there. The central African nation just signed a massive $2 billion bauxite mining deal with Camalco, a subsidiary of Australia-based Canyon Resources, for the Minim-Martap mine in northern Cameroon.
*Data accurate as of the close of markets across the continent
Spotlight Stories
The African Debt Bomb: How Credit Ratings Backfired
Two decades ago, Africa seemed poised for an economic boom. The U.N. had a brilliant plan: let's get some of these African countries credit ratings so they can tap into the global bond market and raise cash for development projects!
What could possibly go wrong?
Enter the "Big Three" U.S. credit rating agencies – S&P, Moody's, and Fitch. They gave most sub-Saharan African nations "junk" ratings, which meant they had to pay higher interest rates on their bonds. But no worries, the thinking went, their creditworthiness would improve as their economies grew. Easy peasy!
Spoiler alert: It didn't quite work out that way.
Over the past 20 years, more than a dozen sub-Saharan countries borrowed nearly $200 billion from overseas bond investors. As their finances faltered, African leaders cried foul, accusing the rating agencies of bias.
It turns out that credit rating countries in Africa posed some unique challenges. With almost no physical presence in Africa, the Big Three weren't fully prepared. Meanwhile, many African nations weren't ready for the flood of cash their ratings unlocked.
Ghana and Nigeria were early poster children. They raised billions in bonds and announced grand plans for power plants and infrastructure. Fast forward a few years, and those ambitious projects have fizzled while debt payments are gobbling up government budgets.
Then there was Mozambique's "tuna bond" scandal. The country's state-owned fishing company issued hundreds of millions in bonds to boost the tuna catch. But – surprise! – an extra $1.4 billion in undisclosed loans surfaced. Auditors couldn't figure out where at least $500 million went. Mozambique defaulted.
For Ghana, the final straw was a nearly $1 billion dam project. They raised $3 billion in bonds right before COVID hit. The economy stalled, debt payments ballooned, and the dam ended up as a bean farm. Moody's cut Ghana's rating, the country defaulted, and things went from bad to, in the words of Ghana's finance minister, "the first circle of Dante's Inferno."
So where does this leave Africa? Stuck between a rock (slow, tedious multilateral lending) and a hard place (the high-risk, high-reward bond market). The African Union wants to launch its own rating agency to counter perceived Big Three bias. But for now, those ratings are the only way to reach global investors.
The road to development, it seems, is paved with good intentions – and sometimes, junk bonds. Reuters has a deep dive into this.
President Tinubu's Plea
Hey there, frustrated Nigerians! President Bola Tinubu has finally broken his silence on the recent protests against the cost of living crisis. His message? Let's take a breather from the protests and have a chat.
In his first public comments since the protests began last week, Tinubu took to the airwaves to address the nation. With a mix of empathy and firmness, he acknowledged the pain and frustration driving the protests, assuring citizens that his government is all ears when it comes to their concerns.
But here's the thing: the protests have taken a tragic turn.
At least 13 people have lost their lives in clashes with security forces. The police, however, dispute this figure, claiming that seven people have died as of Saturday – four from an explosive device during a march in Borno state, two who were hit by a car, and one who was shot by a guard during a looting incident.
Tinubu's appeal for an end to the violence comes as Nigerians have been mobilizing online to organize protests against economic hardship and bad governance. They've been calling for a reduction in petrol prices and electricity tariffs, among other demands.
President Tinubu, who took office in May 2023, stood by his economic reforms, which have included partially ending petrol and electricity subsidies and devaluing the naira. He argued that these measures were necessary to reverse years of economic mismanagement.
Mogadishu: Beachside Blast Claims 37 Lives
In an incident on Friday night, at least 37 civilians lost their lives and 212 were injured when an explosion ripped through a beachside eatery. The Somali government has pointed the finger at the militant Islamist group al Shabaab, though the group has not yet claimed responsibility.
The attack marks the deadliest in Somalia since October 2022, when twin car bombs detonated near a busy market intersection, claiming the lives of at least 100 people and wounding 300 others.
Hassan Farah, a survivor of the blast, described the horrific scene: "I was in the restaurant sipping coffee and having a good chat with friends when I saw a big man running, in a second there was something like lightning and a huge blast. We were covered with smoke. Inside and outside the restaurant many people were lying on the floor while others were bleeding and crying."
The aftermath of the explosion was a grim sight, with the beach littered with sandals and shoes left behind by those fleeing the scene.
In the wake of the attack, President Hassan Sheikh Mohamud and Prime Minister Hamza Abdi Barre met with security agencies to devise plans to bolster the city's security. The president's office issued a statement on X (formerly Twitter), declaring, "The government is determined to eliminate the terrorists. The terrorists want to terrify the civilians. Let the civilians report the terrorists hiding among them."
The Somali government typically uses the term "terrorist" to refer to al Shabaab, without explicitly naming the group.
While al Shabaab once controlled vast swathes of Somalia, government counteroffensives since 2022 have pushed the group back. However, the militants remain capable of launching significant attacks on government, commercial, and military targets, as evidenced by this latest tragedy.
Food for Thought
“We desire to bequeath two things to our children. The first one is roots; the other one is wings.”
— Sudanese Proverb