The path to prosperity doesn’t lie amidst countries building even bigger international debt states Akinwumi Adesina, the head of the African Development Bank. He is quite clear when he urges the continent’s governments to try and boost tax revenue not grab yet more international loans. The statement comes whilst Africa, once again grapples with an economic slump.
Mr Adesina is reported with an interview in the Financial Times to be expecting yet another downturn in the economy of Africa largely being triggered by a slump in commodity prices. This issue greatly affects Africa as well as the slow down in Chinese economic growth. Yet as always Africa is one of the first to suffer from external economic slowdown, largely because of it’s relative financial weakness, in other words it’s large levels of debt.
The phrase ‘fiscal consolidation’ is often used to describe Africa’s position and potential solution. The reality is that decades of borrowing have had only limited success in delivering long term growth in the region. Sure when economic booms are happening in other places, Africa is dragged along through a demand for it’s commodities but the weakness is evident as soon as this demand drops. Nigeria has plunged into yet another recession simply due to the oil price fall, although to be fair this is the first for nearly twenty years.
The pattern will be repeated across sub-Saharan Africa, with GDP falling from it’s 3.5% level in 2015. Many nations are suffering from dwindling government revenues, and the wide budget deficits mean that governments have little monetary options available to them. The temptation of increasing debt is always there but this is precisely the reason why African economies are so vulnerable, billions of dollars of debt taken up in the ‘good years’ reduce the capacity of these governments to respond in a slump.
These debts have to be repaid and the costs of servicing them often rocket in poor economic conditions simply because of the weakness of most African currencies. The scarcity of foreign currencies also impacts African countries and businesses to invest.
Borrowing overseas with a weak domestic currency is a recipe for disaster, investment funds should ideally be sourced locally. For example there are huge African investment and pension funds which ideally could be used to support the African economy. Too often this money is invested in Western countries and businesses to the detriment of African businesses. It’s often depressing to sit in the presentations of these Pension and investment funds produced by some anonymous company who conducts most of their business through a residential VPN (see here) to be extolling the virtues of some international company with minimal links to the African continent when local companies are starved of investment and the potential for growth.
The government of Mozambique has issued a stark warning to it’s creditors warning that a debt restructure was essential in order for the country to recover. It revealed last week that the country would simply be unable to repay or even fully service it’s loans until the gas revenues it was expecting was available sometime after 2021.
It’s a grim picture for the South Eastern African nation – which expects public debt to reach an unsustainable level of 130% of GDP by the end of this year. The International Monetary Fund has offered it’s assistance in negotiating new terms with it’s creditors however direct aid was suspended after they discovered hidden loans of over $2 billion which were not declared.
As hidden debts go this was pretty spectacular, most of it had been built up by various state firms primarily to purchase various security and military equipment. These were ironically supposedly needed to protect the purchase from a previous secret loan which was used to buy a Tuna fishing fleet. All of these purchases and loans were kept secret from both investors and creditors alike.
The total of Mozambique’s debt doesn’t sound that much in the context of some Western countries but the total of almost $10 billion is way outside Mozambique’s ability to service. It is estimated that the country is able to manage a maximum repayment schedule of about $25 million a year, unfortunately it’s current liabilities require repayments of around $38 million dollars every single month.
Many analysts have previously promoted Mozambique as one of the safest investment opportunities in Africa for a variety or reasons. It’s politically very stable and has some good mineral reserves particularly a large amount of natural gas. The country had been experiencing some good growth levels however violent clashes in the North and the worldwide drop in commodity prices have stalled both inward investment levels and the overall economic growth which does still stand at about 3.7% however.
The debt crisis though threatens to halt the economic progress being made in Mozambique. Much of the country has benefited greatly from both the growth and the political stability. You’ll see a new professional middle class emerge in the cities, who purchase luxury good and utilize the improving internet infrastructure. Large media firms like Hulu and Netflix are available there although you’ll need a working Netflix VPN to access properly.
It’s a worrying time for the citizens of this beautiful African country, once more the promise of a better life and economy has been threatened by reckless mismanagement by the State. Hopefully the debt can be restructured in some way in order to allow the country to continue it’s growth story.
After the Christmas holidays many of us take a long hard look at our household budgets. Particularly during the past few years of recession, the amount of debt being taken on by consumers in Europe at least has been falling dramatically. It may have taken a decade or so but in Europe people are beginning to realise that large amounts of debt are an unsustainable way to live your life.
It looks like South African consumers however are making the very same mistake that we did – shopping on credit, treating themselves on luxury goods finance by bank loans and credit sources. It doesn’t help that a lot of South Africans are just very bad savers, preferring to spend now and worry about the future later. But as anyone who has experienced a hiccup in life – savings usually make it a lot more manageable than none.
Many financial journalists are pointing the finger at the many available sources of easy credit in the country. Just like in Europe over the past few years, getting credit is a simple tasks whether through loans, mortgages or other financial instruments. But it’s beginning to look like a problems in South Africa, figures like over 75% household debt of an average salary are extremely high. South Africans spend something like 7% of their incomes simply servicing these debts.
The world is opening up to South Africans and they have ready access to luxury goods and items that were often in short supply during periods of isolation. Many South Africans watch TV and adverts in the UK and the USA to select their purchases. Using technology like VPNs and proxies as illustrated here, they can utilise the internet to watch british tv anywhere, they have a European lifestyle to some extent and are walking into the same debt trap. Of course the cynical would also suggest that President Zuma’s extravagant lifestyle doesn’t really help set a very good example either of course!
Source – Using VPN to Watch British and European TV – http://www.uktv-online.com/