Stress and ‘controlled trauma’: Africa’s debt markets in flux

Egyptian debt issuer Afreximbank, a key lender to African governments, was downgraded by credit ratings agency Fitch this week to one notch above junk, raising questions about the sustainability of the debt burden on African governments. 

Countries across the continent are grappling with high debt levels, rising servicing costs, and constrained access to external financing. Yet economists say that overall, government debt levels are still improving after a decade of steep increases.

Fitch downgraded Afreximbank’s long-term issuer default rating to BBB- from BBB, citing a higher credit risk from “the rise in the bank’s non-performing loans ratio”.  While Afreximbank’s debt issuance is smaller in scale compared to major African commercial banks – it’s about a quarter the size of Egypt’s largest bank, the National Bank of Egypt – it has provided critical financing, especially to countries facing challenges in accessing capital markets. 

Levels of African government debt have been on a steady increase for almost two decades, and have now ensnared more than a few countries. One of Afreximbank’s biggest headaches has been Ghana, which is currently engaged in  complex debt restructuring negotiations.

Zambia remains in default on certain debts, including those owed to Afreximbank. The country is pursuing restructuring agreements with regional lenders, but disputes over creditor status are causing delays. And Senegal is implementing tax reforms to boost domestic revenue following the suspension of its International Monetary Fund programme due to misreporting of debt and deficit figures.

Several countries remain in a precarious state: Sudan, with debt equivalent to 240% of GDP, Eritrea (200%), Cape Verde (105%), Mozambique (97%), Senegal (100%) and Zambia (120%). However, many countries’ debt levels are very manageable, like Nigeria (53%) and Ethiopia (34%). Beyond these outliers, debt remains high but in hand, particularly in those countries with high growth rates. 

External risks

Chief economist at Standard Bank Goolam Ballim says if you attempt an ill-advised broad sweep of African countries, the conclusion might be that the continent is in a consolidation phase. 

Sub-Saharan African governments have been accumulating debt from very low levels in line with their public sector endeavours. But at the same time, there’s been a series of crises over the past decade, the Covid pandemic foremost among them, which led to its own “shadow effects”: soaring inflation and commensurate high interest rates. Lower economic growth meant less debt-servicing capacity because of a decline in government revenue. The result is that the continent has just emerged from a liquidity drought. “In fact, in 2023, the euro bond market effectively shut,” says Ballim.

“Having said that, 2024 was better, and 2025 is also likely to be better,” he believes.

The countries experiencing the biggest problems, notably Zambia, and in some respects Ghana, have reached some level of agreement under the G20 common framework, so they have moved from being “stressed” to what might be described as “controlled trauma”.

Across the continent, the median inflation is now between 4.5% and 5%, and median interest rates are in the vicinity of 8%-9%.

What’s happened more recently is that fresh exogenous risks have emerged.  “The soft underbelly of external risk for the region is commodity prices,” says Ballim. And commodity prices are palpably linked with China’s economic state. 

The region is not impacted that directly by America’s trade wars, as average trade is about 8% of total trade. But friction between the US and China has the potential to be transmitted to Sub-Saharan Africa through commodity prices.  

As a result, Balim says that Standard Bank, Africa’s largest bank by assets, has pared its continental GDP growth estimate from a “respectable” 4% to about 3.8%, which might slip further if the US/China trade wars intensify. 

This story was produced in partnership with Standard Bank.