Small African Economies With Big Debt Burdens In 2017

By Kurt Davis Jr. AFKI Original Published: December 30, 2016, 8:15 am
small African economies with big debtSecurity guards patrol the fishing fleet in Maputo. Photo: Reuters/Times Live

In this second of a two-part AFKInsider series, we look at Ghana, Mozambique, and debt. In part one of the series, we focused on Nigeria and Angola — ideal subjects for looking at big African countries challenged with debt.

Ghana and Mozambique provide insight into small economies challenged with big debt loads. Both countries bet on the long term but are hitting road bumps in the short term.

Ghana and Mozambique are small by GDP compared to some of the bigger African players. In 2015, Ghana’s GDP was US$37.5 billion and Mozambique’s was $14.8 billion compared to Nigeria’s 2015 GDP of $481 billion.

Ghana: spending with tomorrow’s promises for today’s costs

For the first time in the history of the Ghanaian presidential elections, an incumbent lost. Nana Akufo-Addo led the New Patriotic Party (NPP) back to power on Dec. 9, 2016, defeating incumbent President John Mahama, who was running for his second term.

The change in direction by voters is largely tied to disappointment with Mahama’s economic performance. Economic growth has slowed since 2011, despite the discovery of oil that year. Performance in 2016 suggested that the economy may have decelerated to its lowest growth rate in a decade.

Akufo-Addo will enter office with the national debt over US$29 billion as of September 2016. Public debt is estimated to reach 72.4 percent of GDP by the end of 2016. The mushrooming national debt looms over the country’s ability to sustain economic growth. Many officials speculate aloud that the debt could become ever more unsustainable if the incoming government has bigger spending plans than the previous administration. For example, Akufo-Addo plans to introduce free senior high school, reintroduce nursing allowances, and give $1 million US to each constituency.

Although the new administration is still finalizing plans for 2017, if the rhetoric and speculation around spending is half right, new tax revenue will have to be sourced.

The country will be importing its first liquefied natural gas (LNG) in the first quarter of 2017. The state oil firm, Ghana National Petroleum Corporation, is planning to buy between 250 and 500 million standard cubic feet of gas per day for power generation with two import terminal projects planned in Ghana.

Quantum Power Ghana Gas signed an agreement with London-based Golar LNG to build a $500 million liquefied natural gas import terminal. Quantum Power is a subsidiary of Quantum Pacific, the industrial investment group owned by one of Israel’s richest men, Idan Ofer.

The prices charged to the Ghanaian taxpayer by the West African Gas Limited LNG project amount to at least $65 million a year more than the Quantum Power LNG project.

LNG will boost much-needed power generation in the country. The government is prepared to pay more for West African Gas Limited LNG even if Quantum makes more economic sense.

The cost of gas will depend more on market than on import terminal costs. More power generation for the country should theoretically lower the overall cost of power regardless of which project is used.

Ghanaian voters concerned about the economy looked at the $65 million lost on using the West African Gas , combined with volatile oil prices which will hurt Ghana’s second major oil project – TEN project. They questioned Mahama’s ability to grow the economy and his ability to control spending, especially on debt.

You can sense why voters chose change.

Mahama ran on a platform that public debt-to-GDP will decrease in 2017. Critics speculate that this is an economic pipe dream because it is based on Mahama’s plans to cut costs and strength in currency. Both those measures appear unlikely in 2017, which will spell greater debt problems and overall economic concerns for the country.

Mozambique: The no-longer-hidden debt

Mozambique endured a tough 2016. The country has warned its creditors that it plans to restructure its debts to avoid an outright crisis, if it is not there already. Officials have said that the country is unable to pay its debt until gas revenues are available after 2021. The country is expected to have a public debt near 130 percent of GDP by the end of 2016. The International Monetary Fund continues to assert that it will assist Mozambican officials in debt negotiations with creditors – a bright light considering the IMF suspended aid to Mozambique in April after evidence of $2 billion in hidden loans came to light.

This “hidden debt” by state-owned firms has destroyed creditors’ trust in Mozambique. The revelation of the $2 billion followed previous disclosures (and exposés) on another loan, hailed as the tuna bond, which was originally provided in 2013 by the Swiss bank Credit Suisse and a subsidiary of Russia’s VTB to purchase a tuna-fishing fleet. The exposés, later confirmed by state disclosures, showed that the money from the loan was spent on security vessels and other security equipment, which the government later alleged was necessary to protect the fishing fleet.

The Ministry of Finance publishes a presentation on its website that indicates an external debt burden over $10 billion US, of which the country must pay more $35 million in January 2017 alone. Current repayment capacity hovers around $25-to-26 million. The 2017 budget does not suggest a high capacity for cutting spending. The coal-producing country cut spending about 1 percent in 2016. Some analysts already suggest a slight bump in coal production from Trump’s America. Other parts of the globe may force a coal price decline which would make a 1 percent budget change seem negligible.

Inflation in 2017 is expected to remain above 15 percent, which is an improvement over the near-30 percent seen in 2016. The currency will feel the pressure with the inflation and with the external creditors and investors losing trust in the Mozambican development plan. Any big swing on the currency will only spell further trouble for paying debts.

Critics argue that most investors and creditors are banking on the IMFs ability to wiggle its way back into position as intermediary with Mozambican officials and creditors by dangling its new aid program (pending an independent debt audit) as a carrot to the government.

But, if Mozambican officials know they are going to default in January or February 2017 at the latest, are they willing to test the IMF’s ability to sit idle as the light dims on one of its once-bright stars? Many investors believe the IMF will step in to support Mozambique regardless of many previous concessions. As 2016 ends, we won’t have to wait too long to see how this drama plays out.

Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at

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