Africa’s International Debt Market Access-Cost Conundrum
- Jared Osoro
- Feb 24
- 10 min read
Updated: Sep 11
Sub-Saharan African economies are full of optimism following their embrace by international capital markets. But that embrace has brought with it prohibitive costs. I argue that the prohibitive cost arising from unjustifiable risk premiums has pushed the continent to the brink of debt distress. With the continent’s significant financial resource needs that inhibit the ability to close the development gap, there should not be a trade-off between financial markets access and the cost of finance. Unlocking the prevailing conundrum in this trade-off requires addressing the limitation of the financial architecture, especially reforming agencies that have the ability to put a thumb on the cost scale to the disadvantage of the continent.
The increasing access to international capital markets by Sub-Saharan African (SSA) economies is deservedly celebrated. However, this access comes with significant costs. The two aspects of access and cost are linked, and attuned to the collective development aspirations of the continent. The realisation of these aspirations necessitates a sustained rise in investment, as a prerequisite for strong growth. But currently, SSA’s growth relative to other developing markets is lacklustre, in part due to low investment. This low output growth informs investors’ perceptions of these economies, and subsequently feed into high-risk premiums on borrowing.
It is the high cost of capital associated with these risk premiums that has constrained investment. This means that the continent has been left in a high capital cost, low investment, and low growth trap. Breaking the trap will entail addressing the risk premiums which, as I argue in this paper, are unjustifiably high. Consequently, there is an access–cost conundrum that needs unravelling.
The access–cost conundrum is anchored in two questions: first, should the cost of capital come in the way of its access? Or should the strategy be to pursue access as the cost aspect is addressed across time?
To address these questions, let’s first consider the current position. For a continent that has conventionally tapped international capital from various sources, SSA’s venture into Eurobonds – the debt instruments issued in international markets by a country in foreign currency, often US dollar or Euro-denominated – is a reflection of international markets’ willingness to embrace it. Indeed, the fact that over the past three decades, 21 African countries of varied sizes and financial markets depth have made combined Eurobond issuances of US$115 billion[1], is noteworthy. While this may be necessary “hard-won market access”[2], it is insufficient in meeting the continent’s funding needs (e.g. for economic development).
This is because economies that have historically had stellar growth have deployed more resources for investment. From 1991 – 2024, emerging markets and developing countries in Asia registered an annual average real growth rate of 7.0%, corresponding to average annual investment equivalent to 36.8% of their combined GDP. Meanwhile. SSA’s average annual real output growth over the same period is lagging at 3.8%, largely driven by lower investment, at just 19.9% of GDP (Figure 1).
Figure 1: Output and Investment
Investment has been low partly due to higher costs of capital for these economies. A 2023 study by the IMF highlights that between 2003 and 2021, SSA countries paid a 66% higher coupon at issuance compared to their peers from other regions[3].
Hard-won access to international capital markets will not deliver adequate financial resources to bridge the gap between SSA gross domestic savings, whose annual average for the 1991 – 2024 period is estimated at an equivalent to 18.5% of its combined GDP, and investment needs, equivalent to at least 30.0% of GDP, necessary for faster growth.
The Balancing Act: The Reality of SSA Debt & Development
SSA governments’ activity in the Eurobond market presents a partial picture of what it takes to unravel the access-cost conundrum. The full picture encompasses the inclusion of both private debt and sovereign domestic debt. But that picture has two sides, each with differing clarity.
The clear side is the fact that the continent’s total debt is a tiny share of global debt. According to the IMF’s 2024 Global Debt Monitor[4], global debt amounted to US$250 trillion in 2023, equivalent to 237.2% of global GDP. Against this background, developing economies owe an equivalent of only 88.3% of their GDP, the ratio having risen from 20.2% in 1970. The private sector share of the total debt is even smaller, at just 38% of GDP for this cluster of economies in 2023, though that is a marked improvement from 4.6% in 1970. Despite this, the risk of Africa’s debt posing challenges or distress is real. Evidence points to elevated post-covid debt-at-risk for developing economies, as well as a sustained higher share of government revenues going towards interest payments (Figure 2)[5].
Figure 2: Lurking Distress
The less clear side of the picture points to divided perspectives on whether the levels of African debt are indeed problematic or whether these concerns have been excessively inflated. To determine whether African debt levels are in fact a concern, it is worth returning to the idea that governments in SSA have to make large investments (up to 11% of GDP per year) in order to meet the continent’s development gap with fast-growing emerging markets. That means that “putting a lid on public debt”[6] is neither presented as, nor intended to be, a blanket remedy.
The continent is not seeing a reincarnation of the 1990s debt overhang narrative[7], which would justify a radical freeze on public debt. Debt overhang is not a malady across the board[8], so encouraging African economies to go cold turkey on public debt is not a solution. In fact, debt will need to play a critical role in filling the funding need of between US$ 1.3 trillion and US$ 1.6 trillion in SSA to meet the Sustainable Development Goals and the African Union’s Agenda 2063[9].
The Cost of Debt: Understanding Market Perceptions in SSA
As SSA puts its money where its development ambitions are, the necessity of ramping up financial resources obliges a careful look at the cost of debt dynamics. It is obvious that a yield differential exists between advanced economies’ bonds and those of the same tenor issued by emerging markets and developing economies, even as there is a neat co-movement (Figure 3).
Figure 3: Bond Yields (%)
Emerging markets and developing economies do not get the same market treatment. And SSA countries are at the bottom of the pile, facing the highest interest rates even among other emerging markets and developing economies. That SSA pays higher interest in the international capital markets than their counterparts in Asia and Latin America with similar credit ratings has attracted scrutiny[10].
It is possible that markets sometimes base their premium judgements on cursory sentiments. As Paul Krugman argues, there is a possibility of an “insanity premium” where the bond market in the US starts to reflect that President Trump is “really who he seems to be” and long-term rates start rising even as short-term rates decline[11]. If that is so in a sophisticated market, it is easy to fathom the “African premium” in a continent where cursory assessments of risk are core in influencing capital pricing.
More recent work from the IMF considers why this is the case[12]. It suggests that the excess premium is premised upon perceived limitations in the transparency of budget processes, the importance of the informal sector, inadequate levels of financial development, and the wanting quality of public institutions.
However, if these four structural factors are accounted for, the excess premium vanishes[13]. In particular, rating agencies’ assessments matter, for better or worse, in setting credit ratings for different economies, and subsequently determining the cost of capital. These agencies generate these assessments using highly sophisticated statistical models, which require various assumptions and inputs to function. If they smell danger of debt distress, bond yields will respond. That begs the question: are those assessments always water-tight?
At the core of the rating process is the implicit assumption that sophistication equals quality, even if in actuality they may be nothing more than (well-informed) conjecture. At best, beauty can sometimes be mistaken for truth, leading to dire consequences[14]. At worst, ratings models’ elegance could be tantamount to “foolish sophistication”[15].
Finance is not physics. The phenomena measured in physics do not generally change almost in real time. Financial modelling, however, changes the statistical laws governing the financial system in real-time. This is because market participants react to measurements and therefore change the underlying statistical process, implying that modellers are always playing catch-up.
I am not suggesting that the models employed by the rating agencies are without merit. However, to the extent that these models assume away the characteristic of the dynamic nature of the financial systems’ statistical laws, their outputs can be critiqued. The ratings developed by these agencies have therefore been blamed for being ex post reactions, rather than anticipations. In other words, ratings are lagging, as opposed to leading, indicators. They reflect the agencies’ estimates of the probability of default over a given period, ignoring the possibility that the market, for any given rated security, may be illiquid. They equally ignore the likely recovery rate in case of a default.
This critique recently played out in Kenya, where Moody’s made a welcome review of the outlook from negative to positive[16], only for the African Union’s African Peer Review Mechanism (APRM) to call it an admission, in remedy, that its earlier negative outlook was an incorrect rating[17]. The APRM made a similar critique in 2022 regarding Ghana[18].
Whether accurate or not, ratings engender perverse incentives among investment banks whose role in international market access is critical. The investment banks’ profit maximisation agenda incentivises them to structure bonds in a manner that are attractive to investors, regardless of whether the cost to the issue is steep. And a lot of the time, the investors in these debt instruments are different functions of those very same investment banks, which exacerbates the perverse incentive to implement excessively high yields given the real risk associated with borrowing in these countries.
Indeed, the oversubscription of the Eurobonds issued by SSA governments is often seen as a sign of market confidence, while it is rather a hidden trap[19]. Based on the logic of demand and supply, an oversubscription (i.e. supply exceeds demand) should lead to the coupon rates – the rate of bondholders’ compensation at an agreed frequency until maturity – coming down.
But this does not happen in practise. Even when there are rating reviews subsequent to initial bond issuances, they seem to have little impact on correcting possible initial mispricing of bond rates. Indeed, it is estimated that ratings actions affect bond yields in Africa only a third of the extent to which they affect coupon rates in other markets. This suggests that the initial bias or mispriced risk ratings developed by credit rating agencies enable investment banks to issue sovereign bonds at high rates relative to their actual risk profile, enabling them to maximise their profits throughout the duration of the bond.
Opportunities for reform
The need for continuous reforms of rating agencies[20] and domestic financial systems will help not just improve access to financial resources to support SSA’s development, but also unravel the binding cost of finance constraint.
The reform proposals are ambitious in scope, have a sense of urgency, and are long term in orientation[21]. For instance, the proposal to establish the Africa Credit Rating Agency (AfCRA) is aimed at providing an opinion alternative to that of the global trio[22]. It remains to be seen whether establishing AfCRA will be accompanied by novel methodologies that address the limitations earlier discussed or will trigger introspection by the dominant rating agencies regarding their rating of SSA issuances.
But reforming credit rating agencies, while necessary, will not be adequate without a careful look at investment banks’ incentive structure that tilts towards investors at the expense of issuers. While their profit-maximisation objective is legitimate, the need for a balanced framework that shifts the benefits from being a zero-sum game towards an equitable regime for both investors and issuers is compelling. Such reforms ought to be anchored in regulatory scrutiny of the investment banks’ bids preceding all issuances of bonds in the international capital markets.
More broadly, in the scheme of things, the SSA’s focus on international financial markets has merits but is not complete unless its seen as complementary to vibrant local financial markets. In a bank-led financial ecosystem like Sub-Saharan Africa’s, the case for promoting efficient domestic capital markets is essential in boosting domestic savings[23]. Economies with high domestic savings are associated with high investments, underpinned by efficient allocation, and are less vulnerable to external financial constraints (Figure 4). Therefore, efforts need to be made domestically to strengthen capital markets as well. A deep-dive into understanding initiatives that can strengthen domestic capital markets is essential.
Figure 4: Gross National Savings as a share of GDP (1991 – 2024)
The need to blend the knowledge of foreign-based experts with locally-based experts who have invested in intensely understanding the local markets is critical. There is only so much that an investor gets from a road show or a rating report. Intermediation of insights from organisations like Plato Group will be critical in bridging the knowledge gap between international policy makers and investors, and local economies. Their network of former senior economic officials and bankers from London, Washington and New York, coupled with economists and leading national experts in African economies, provide a new and valuable insight that investment banks, governments and investors can, and should, avail of.
This thought leadership paper is published in collaboration between Jared Osoro and Plato Group Ltd. The usual disclaimer applies.
Jared Osoro
Jared is a member of the Monetary Committee of the Central Bank of Kenya. He is a financial sector macroeconomist with over two decades of experience (Jared Osoro | LinkedIn). He previously served as Bank Economist at the East African Development Bank for more than ten years, and has written extensively on finance as an engine of development.
Plato Group
Plato Group is a network of global economists, senior monetary and fiscal policy experts, bankers, lawyers, and diplomats (incl. former Ambassadors), with direct experience in markets across the world. Plato Group blends international and local expertise, providing comprehensive insights tailored to a client’s specific needs.
Footnotes
Can Africa’s wall of eurobond repayments be dismantled? - Bond Vigilantes
Sub-Saharan Africa’s Risk Perception Premium: In the Search of Missing Factors
Ibid.
Elbadawi, I.A., Ndulu, B. J and Ndung’u, N. (1997), “Debt Overhang and Economic Growth in Sub-Saharan Africa”, in External Finance for Low Income Countries, by Iqbal, Z and Kanibur, R (editors), Chapter 5, pp. 49 – 76, IMF. [External Finance for Low-Income Countries | IMF eLibrary]
Global Outlook: African sovereigns at high risk of debt distress
Sub-Saharan Africa’s Risk Perception Premium: In the Search of Missing Factors
Ibid.
Danielsson. (2002), “The emperor has no clothes: Limits to risk modelling”, Journal of Banking & Finance, Volume 26, Issue 7, pp. 273-296, [The emperor has no clothes: Limits to risk modelling - ScienceDirect]
Moody’s Investor Services Erred on its Kenya Rating Actions | African Peer Review Mechanism (APRM)
APRM Denounces Moody’s Inaccuracies in Ghana’s Rating Downgrade. | Union africaine
Eurobonds issued by African countries are popular with investors: why this isn’t good news
To fix Africa’s debt crisis, reform credit ratings - Development Matters
our-common-agenda-policy-brief-international-finance-architecture-en.pdf
Moody's, Standard & Poor's, Fitch; African leaders convene on establishment of homegrown solution, the Africa Credit Rating Agency. | African Union
https://fsdafrica.org/our-work/sustainable-capital-markets-development-in-africa/
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