All posts by Michael Patotschka

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Africa Investment Forum 2024 Gains Global Influence with Record Number of Investors and Closes with $29.5 Billion in Interest

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This article is part of a series produced in collaboration with the African Development Bank in light of its sixtieth anniversary. Please visit our dedicated portal to read about the Bank’s history and its activities on the continent.

This year’s Africa Investment Forum, held in Rabat, Morocco from 4th to 6th December, once again highlighted the continent’s immense investment potential. Held under the theme “Leveraging Innovative Partnerships for Scale,” the forum attracted the widest participation ever since its launch in 2018. A total of 1,707 investors from 200 institutions across 83 countries attended the event.

Opening the forum, Dr Akinwumi Adesina, president and chairman of the board of directors of the African Development Bank Group, made a forceful call for more investment in the continent, urging investors to “believe the data” and not be swayed by the misperceptions about the continent. Africa, he noted, will account for a quarter of all people on the planet by 2050, boosting demand for goods and services on the continent.
Continue reading Africa Investment Forum 2024 Gains Global Influence with Record Number of Investors and Closes with $29.5 Billion in Interest →

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After $300bn promise, what next for Africa’s exports to China?

Trade between Africa and China looks set to reach the targets offered in 2021; but what will it take to shift it toward value addition on the continent?

August 15th, 2024 Opinion by Rosie Wigmore Image : FADEL SENNA/AFP

In 2021, at the eighth Forum on China-Africa Cooperation (FOCAC), China pledged to import total African products worth $300bn over three years. This was not an overly ambitious target given that, based on Chinese import figures, Africa exported $275bn worth of goods to China between 2019 and 2021. Indeed, China has been Africa’s largest bilateral export destination since 2009. Nevertheless, it was still an important target because it was not only the first import target that China had set for Africa, it was also the first import target that had been set for Africa by any development partner.

A key reason for the target was to respond to African demands to reduce growing trade imbalances between Africa and China. To help reach the target, China also announced a range of supportive trade initiatives at FOCAC including $10bn worth of trade financing to boost African exports to China, “green lanes” to fast-track African agricultural exports to China, online shopping festivals to promote and sell African products in China and further increase the scope of African products enjoying zero-tariff treatment.

The good news for Africa is that this target is very likely to be met. Between January 2022 and June 2024, and again based on Chinese import figures, African countries have exported a total of $286bn worth of goods, meaning China has to import just an additional $14bn worth from Africa over the coming months to reach the target. From this perspective, the target has worked: it’s been a success.

The bad news is that over the same period Africa’s trade deficit with China actually widened. For example, in 2021 the trade deficit was $39bn and by 2023 it was $63bn. Furthermore, while there was some diversification, in 2023 just nine African countries, all resource-rich countries, accounted for 83% of exports with China and this trend has continued into 2024.
How to build on trade success

So what can be done in the next iteration of FOCAC to build on the success while also recognising the shortcomings of the target? Continue reading After $300bn promise, what next for Africa’s exports to China? →

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How Africa’s ‘ticket’ to prosperity fueled a debt bomb

Credit ratings were meant to help sub-Saharan countries tap global investors to fund much-needed development. But low scores, heavy borrowing and bad luck have left many struggling with crushing bond debt.
By Libby George, Tom Bergin, Tom Wilson and Lawrence Delevingne
August 1, 202411:55 AM GMT+2Updated 27 min ago
In 2002, Africa seemed poised to rise. Wealthy creditor nations were wiping billions of dollars of unsustainable debt off the books of sub-Saharan countries, and global demand was surging for the commodities the region exports, supercharging hopes of a sustained economic boom.
The United Nations, backed by the United States, had a plan to fuel the expansion: sovereign credit ratings. These metrics — essentially an informed guess of a nation’s ability to repay lenders — would for the first time allow a wide swath of the poorest region on Earth to tap yield-hungry investors in the global bond market. And the cash borrowed wouldn’t come with strict controls on how it would be spent, as is the case with financing from multilateral institutions like the International Monetary Fund. The U.N. heralded the initiative as “an assault on poverty in Sub-Saharan African countries.”
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Today, the optimism has faded, washed away by a deluge of debt.
Essential to the plan were the “Big Three” U.S.-based credit rating agencies — S&P Global Ratings, Moody’s Ratings and Fitch Ratings, which together account for more than 90% of global ratings. The rating agencies collected fees for their services and began applying their complex analyses to the region.
Given the troubled economic history and conditions of sub-Saharan Africa, it came as little surprise that the Big Three gave most countries below-investment-grade, or “junk,” ratings. Those low scores meant the countries had to pay higher interest rates on their bonds to attract investors who might otherwise balk at the risk. The thinking at the time was that African countries’ ratings would improve, and their cost of borrowing decline, as their growing economies allowed them both to repay their debts and invest in development.
Instead, the push for credit ratings set these nations on a path to debt many could not afford. Over the past two decades, more than a dozen sub-Saharan countries borrowed nearly $200 billion from overseas bond investors, according to World Bank figures. As their nations’ finances faltered, African leaders lashed out at the rating agencies with allegations that the firms were biased in their assessments. Reuters did not find evidence of systemic bias in the Big Three’s ratings for the region. Rather, Africa’s debt crisis highlights the potential pitfalls when sophisticated financial markets meet impoverished countries eager for development.

After dozens of interviews with current and former Big Three employees, large investors and officials with government and multinational organizations, along with a review of hundreds of pages of regulatory and legal filings, Reuters found that the Big Three weren’t fully prepared for the challenges of rating a region awash in poverty and unfamiliar with the process, and that many of the nations involved weren’t ready for the torrent of cash their credit ratings unlocked.
The upshot: Billions of dollars meant to pay for badly needed improvements to infrastructure, education and healthcare are now going toward interest payments. Sub-Saharan Africa’s average debt ratio has almost doubled in the past decade — from 30% of gross domestic product at the end of 2013 to nearly 60% in 2022. The region today has the highest rate of extreme poverty in the world.
When debt service crowds out spending on infrastructure and other public goods, “the country doesn’t grow, and you just end up in a vicious cycle of poverty,” said Christopher Egerton-Warburton, founding partner of Lion’s Head Global Partners, a London-based investment bank that has advised African governments.
The financial burden carries deadly potential. In June, anti-government riots exploded across Kenya in protest against proposed tax increases, including levies on bread, cooking oil and other staples, to help fund payments on the roughly $80 billion Kenya owes creditors. The rioting, which continued after the proposal was withdrawn, left dozens dead and many more injured. Continue reading How Africa’s ‘ticket’ to prosperity fueled a debt bomb →

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Africa’s funds too often dormant or misused, reports Mo Ibrahim Foundation

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The Foundation says that Africa could do much better in using the financial resources at its disposable to achieve development outcomes.

June 21st, 2024 ByLuke Kilian

Africa must put in place new processes to allocate “dormant or misused” funds in order to meet the Sustainable Development Goals by 2030 and the African Union’s Agenda 2063, argues a new report from the Mo Ibrahim Foundation.

While the annual cost of achieving the SDGs and the African Union’s Agenda 2063 in Africa is estimated by various sources at between $870bn and $1.3 trillion, Africa’s four main sources of finance (revenues, personal remittances, official development assistance and foreign direct investment) amounted to just $829.7bn in 2022, the Foundation reports.

However, the report argues that resources mostly exist, but either lack the relevant processes to be effectively allocated or are either dormant or misused.

Mo Ibrahim, the Sudanese-British telecoms billionaire who chairs the foundation, said that Africa must overhaul its processes to ensure money is getting to where it is needed.

“We need a complete change of paradigm. This is not about Africa coming to the developed world with a begging bowl and developed countries considering how much more they can pledge. This is about smarter money, not just more money. As this report outlines, the money is already there. But current processes prevent resources from being used to properly address the challenges.”

“What I hope this report will show…is that the money is there, but mainly stuck in pipes, or misused.”

That echoes arguments made by the African Union. Domestic resource mobilisation could cover 75-90% of the financing needs for Agenda 2063 on average per country, according to the African Union.

“The money to finance Africa’s future is right here on the continent and within the global African diaspora. It lies in our natural resources, our people, and our innovations,” says Nardos Bekele-Thomas, CEO of African Union Development Agency.

The issue, however, is that the resources are not being used and remain dormant. Issues highlighted by the report include illicit financial flows (IFFs) – which cost Africa an estimated $100bn a year – and weak tax systems.

The money raised from ending IFFs could surpass both ODA received ($81bn annually) and remittances sent back to the continent ($97bn annually).

On taxes, Africa has the lowest government revenue in the world. In 2024, only 5 countries comprise over half (53.7%) of total Africa’s revenues: South Africa, Algeria, Egypt, Morocco and Nigeria.

“With the average tax-to-GDP ratio in Africa still at 15.6%, half the OECD average, strengthening tax systems appears a quick win. Indeed, Africa lost $46 billion in corporate taxes due to tax incentives in 2019, more than half of ODA received,” the Foundation says.
Debt not the answer

Africa’s total external public debt has almost tripled since 2009, rising from $220bn to $655bn in 2022. This is the highest public debt stock Africa has had in over a decade. Countries have had to cut essential public spending, diverting development funds to debt servicing.

“Debt cannot be the way out, as stock and servicing costs have tripled since 2009, and its increasingly complex structure renders traditional relief efforts obsolete,” the report finds.

Arkebe Oqubay, former senior minister and special adviser to the prime minister of Ethiopia and a contributor to the report, says that debt cancellation must be high up the agenda.

“Debt cancellation and restructuring should be the core solution to address the debt stress and financial pressure in African countries. It is of the utmost urgency to establish new financing mechanisms for African development.”
Utilising Africa’s resources

With the ongoing green revolution, Africa’s mineral reserves are in high demand as they are critical for renewable energy and low-carbon technologies. The report suggests that for the continent to make the most of this, it will have to not just produce raw materials but manufacture, design and refine them, in order to access higher value chains. More than 70% of the world’s cobalt is produced in DR Congo, yet Chinese companies account for 68% of the global cobalt refining capacity. Around 80% of the DR Congo’s cobalt output is owned by Chinese companies which produce higher value products such as batteries.

Another way to unlock more money is through Africa’s carbon-sinking capacity, according to the report. The Congo Basin forest offsets more than the whole African continent’s annual emissions. According to the African Carbon Markets Initiative (ACMI), Africa only uses 2% of its annual carbon credits and should aim to sell $100bn worth of credits a year by 2050.

Source, African Business, 21st June 2024

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