Africa’s eurobonds are a blank cheque
Eurobond financing is booming, even in the least developed emerging markets. African sovereigns issued $26bn on the market last year alone. You would be hard-pressed, however, to find out how the money was used.
In many Eurobond prospectuses, you will find that the “Use of Proceeds” section consists of a mostly blank page containing one short message: “The Republic of . . . will use the net proceeds of the issue for general budgetary purposes.” That blank page is, essentially, a blank cheque.
Despite the risks associated with the potential misallocation of borrowed money and growing debt distress, the quality of public debt management in debtor countries is not reflected in traditional sovereign credit analysis.
In this context, environmental, social and governance (ESG) evaluations could be a game changer. They could focus attention on often overlooked debt management and governance issues, factors that experience has shown to be material to sovereign risk. Scoring those factors would offer investors a more accurate risk profile of sovereign issuers.
As the World Bank and IMF hold their annual meetings in Washington this week, sovereign borrowing without conditionality is certain to be a hot topic. Debt campaigners are clamouring for discipline as the external debt of African countries reaches unsustainable levels. Organisations such as the IMF are being criticised for encouraging reckless borrowing. There are legitimate questions as to how countries can be facing debt distress, given that so many have recently benefited from debt bailouts.
Some of the answers can be found on the blank pages of the Eurobond prospectuses.
It seems barely possible today that, despite great pressure for loan transparency from international institutions, G20 governments, rating agencies and official creditors, sovereigns are still able to borrow billions of dollars on the Eurobond market with little or no accountability regarding the use of proceeds.
When a private company makes a pitch for new finance, a business and investment plan is essential, including clarity about how the borrowed funds will be invested in future earnings capacity.