With cheap cash flowing freely from national governments around the world and interest rates on bonds for most advanced nations dwindling below 2 percent, many investors are now looking for higher yields in developing countries.While there appears to be a strong appetite for higher interest African bonds, it’s fair to wonder if money raised from bonds will actually lead to economic growth, or merely become part of a giant Ponzi scheme with African nations having to continually raise money to pay past debts.
Rwanda has announced a $400 million bond sale, with expected interest rates hovering around 7 percent. This is up from the $200 million sale Rwanda had previously been considering. While Rwanda is the most recent example of a major bond sale, other African governments have also been selling bonds. In 2012 over $7 billion were raised through the African bonds market, compared with just over $5 billion in 2011.
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Rwanda’s bond sale should carry interest rates around 7 percent. Given the high level of risk involved in Rwanda, which has a fragile economy and GDP of only $6.5 billion, the costs are surprisingly low. How Rwanda will repay the loans remains unclear, the country currently receives almost 40 percent of its revenues from foreign aid. In theory, the money will be used to improve infrastructure and invest in the economy.
And while South Africa had previously dominated many bond sales, more and more African countries are cashing in on the opportunity to raise funds. Tanzania has raised some $600 million through bond sales with interest rates hovering at 6.2 percent, while Senegal is offering bonds with 5.76 percent rates. Meanwhile, oil rich Nigeria is enjoying lower interest rates of only 4.2 percent and Namibia has bonds with rates at only 3.97 percent. Zambia could be looking to raise as much as $4.5 billion through sales, a huge sum for any African nation.
Still, corruption is rampant across many Africa nations and collecting tax revenues has proven challenging in economies that remain largely underground and off the grid. Money that does make it way into government hands often finds its way to the bank accounts of corrupt officials. With these types of conditions it’s fair to wonder if African bond sales are merely a large “Ponzi” scheme.
Soon, African nations may find themselves taking out bonds simply to pay past debts from previous bond sales. And with a long record on African nations having defaulted on foreign loans, there’s ample reason to believe that future bankruptcies could come into play. While the returns on African bonds are much higher than German and American bonds, the extra interest may not be worth the increased risk.
Still, if Rwanda and its peers can properly use and manage the funds the bonds could lead to economic growth. Many African nations are rich with natural resources, but lack the capital to properly export these resources. While foreign countries, such as China, have helped many African nations develop their infrastructure, conditions remain poor across the continent.
Whether or not the current round of bond sales turn out to be positive investments for the peoples across Africa, or simply another burden for future generations to pay for, will depend on how well the money is managed. If corrupt leaders merely funnel the money into private bank accounts, investors and common citizens alike could see huge losses.