Africa needs its own ‘repo’ market

The writer is UN under-secretary general and executive secretary of the UN Economic Commission for Africa

The global health and economic crises gripping Africa are hurtling the region into its first full recession in a quarter of a century.

Economic growth in Africa, which had been forecast at 3.2 per cent, is now expected to be between zero and 1.0 per cent, according to the UN Economic Commission for Africa.

The crisis highlights the needs for urgent economic and financial measures to help soften the blow. The G20’s decision to suspend debt service for the poorest countries will help.

But Africa’s needs are much bigger and urgent. It is time to create a new asset class that would attract a new class of investors while shaving off the higher borrowing costs that African nations face because of age-old stubbornly sticky perceptions that they are especially risky.

To do that, we should create a new sustainability and liquidity facility for the continent, modelled on existing market-based and commonly used facilities in Europe and the US. It would help cut borrowing costs for African governments by providing incentives for the private sector to increase their portfolio investments on the continent and accelerate job creation.

The crisis has created an unusual opportunity to place sustainable economic growth on a solid footing during the recovery phase and address longer-term sustainable development priorities.

The UNECA proposes creating a special purpose vehicle modelled on the repurchase “repo” facilities commonly used by central banks such as the US Federal Reserve to help support the smooth functioning of markets.

Right now, most African sovereign bonds are rated as subinvestment grade, and spreads more than doubled during the first part of the coronavirus crisis. Although they have fallen back a bit, borrowing costs remain so high that they deprive governments of meaningful access to international capital markets. This is despite solid macroeconomic performance of many African countries.

Now many African countries face a vicious cycle: lack of market access due to rising spreads at a time when they need it most and consequently weaker investment and growth potential — in some cases the ugly spectre of downgrades, defaults and debt restructuring may follow.

An SPV funded by a major central bank could help break this pernicious pattern and create a virtuous circle for countries with sustainable macroeconomic fundamentals. It would allow these African governments access to new liquidity while enticing private sector investors to re-enter or enter this market for the first time. This will help to underpin a robust and sustained build-back strategy.

Here’s how it would work: senior lending capital for the facility would be provided by a central bank or coalition of central banks with hard currency reserves. If it were then backed by an equity injection from the same central banks, in the form of a funded commitment or guarantee, the SPV could attract an A plus rating, much higher than many African sovereigns.

Private lenders would be able to obtain financing to buy bonds from eligible countries by pledging them as collateral against this facility. Based on the experience of repo facilities in other markets, there is little doubt that the creation of this facility would lead immediately to substantially lower spreads for African sovereigns, allowing them to access markets on more favourable terms.

This facility could focus on a range of sustainability initiatives and projects throughout Africa, beginning, for example, with the UN ECA’s Sustainable Development Goal 7 initiative to bring in more clean-energy projects. In addition, the facility could support investor groups that are mobilising private capital in support of the broader SDGs.

What we need now is the interest and commitment of key G20 governments and central banks. In 2017, the group launched a “Compact with Africa” with a central aim of increasing the attractiveness of private investment through new macro, business and financing frameworks. Now the G20 must go a step further and support a profitable private sector led initiative which will buoy Africa’s immediate liquidity and build back better strategy.

Never before has the need for a predominantly private solution been so important and urgent. Helping to launch this facility would be a tangible and pragmatic step towards building Africa’s capital markets. There is no time to waste.

Letter in response to this article:

Economic reform is the way to drive down Africa’s debt costs / From Alain Nkontchou, Managing Partner, Enko Capital, Chairman of the Board, Ecobank Group, London SW1, UK