African governments in countries like Kenya, Uganda, Mozambique, and Tanzania have taken on a lot of debt since the 2008 financial crisis. Although debt levels vary country by country, the situation has become problematic continent wide.
Source: Geopolitical Futures (Click to enlarge)
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That’s to say, there’s a possibility of widespread default in Africa. And such default could create opportunities for outside powers that covet the region’s natural resources.
How It Happened
In the wake of the 2008 financial crisis, global interest rates were low and money was cheap. Investors who sought greater returns turned to riskier investments, including African sovereign debt.
Countries across the continent took on debt to fund infrastructure and other development projects. Debt levels in Nigeria and Botswana, for example, are just under 50 percent of GDP. That is already considered high for developing countries.
Debt in other countries like Mozambique and South Africa exceeds their GDP. Median public-sector debt in sub-Saharan Africa was 48 percent in 2016.
Source: Geopolitical Futures (Click to enlarge)
Similarities with the 1980s Debt Crisis
The current situation resembles the African debt crisis of the 1980s. In the time leading up to the debt crisis, many sub-Saharan African countries similarly took advantage of lower interest rates and took on more debt.
When Western central banks raised interest rates to combat inflation, the cost of servicing this debt grew. The fact that many of the loans were denominated in foreign currencies made things worse.
When interest rates in the United States went up, the dollar appreciated relative to local currencies in sub-Saharan Africa, making repayment even costlier. Meanwhile, the price of the commodities on which so many of these countries depend fell, decreasing the amount of money they had to pay back their loans.
Over the past 10 years, amid an environment of low global interest rates, African governments have likewise accumulated more debt. As the US and EU economies recovered, central banks have begun to raise interest rates.
As much as 70 percent of this debt is denominated in foreign currencies, according to S&P, though the figure is much lower for Nigeria and South Africa, which together constitute a large portion of total sub-Saharan African debt.
A decline in global demand for commodities—say, if China were to enter a recession— would once again put pressure on these government revenues, many of which are still dependent on natural resources.
Africa is a minor player in geopolitics. Unfortunate as it may sound, its relevance stems from how stronger countries interact with it and manipulate it. So while its current indebtedness may not shape the course of international affairs directly, it may, in fact, benefit China.
If these countries defaulted on their debt, foreign investment would dry up. China’s willingness to accept repayment in commodities would leave it as one of the few remaining options for countries struggling to build infrastructure.
Beijing could, therefore, drive as hard a bargain as it wanted. China will continue to mine Africa for its resource needs. The only thing that will constrain its behavior in that regard is its own capital needs. It will, in other words, have to determine how much to spend as its own economic problems continue to mount.
Were this to transpire, it’s possible that China’s rivals, noticing how much Beijing benefits from its relationship with Africa, would begin to follow suit, generating a renewed Great Game competition on the continent.
This could take the form of other resource-dependent countries that are opposed to China, such as Japan, seeking similar quasi-barter deals on the continent in exchange for secured access to commodities.
But what is possible is not particularly likely.
A debt crisis would have social implications that would make doing business extremely difficult, limiting the upside to China and decreasing the likelihood of other powers opting to compete with it.
Even if it did, the arena would be peripheral to great powers’ core interests. Unlike the colonial economies of the 17th–19th centuries that drove European competition in Africa, among other places, modern-day economies and their supply chains rely on a global market rather than sequestered mercantilist ones.
China’s presence and influence in Africa are real, but in terms of global geopolitical consequence, they are likely to remain limited.
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