Sovereign Bond: A Brave Step By Morocco

VENTURES AFRICA – The announcement that Morocco is planning to unveil billions of dollars worth ofsovereign bonds is a sign that some African countries are thinking outside the box when it comes to closing the continent’s funding gap, which World Bank estimates puts at $93 billion per year for infrastructure alone. It is a brave move, but it remains to be seen whether it will be a successful one and catch on in other countries.

The Moroccan sovereign bond, expected to be released in October, will be used for investments in the justice and subsidy systems. With the country’s economy, like so many in Africa, highly dependent on the ailing Eurozone, the government is seeking funds from elsewhere to shore up its economy.

Development such as that desired by Africa is expensive, and bonds are increasingly being seen as a good alternative option as aid falls and investment from Europe becomes less reliable. Development finance from industrial nations is something Africa can no longer rely on. Morocco is now following the suggestion of Dabiso Moyo, who argued in her book “Dead Aid” that bonds were a better alternative to relying on diminishing aid handouts. Common in Europe and Asia, we will now get the chance to see whether they can catch on in what has been an initially reluctant Africa.

Morocco’s boldness is in contrast to the inertia over bonds elsewhere on the continent. At the end of last year, Kenya postponed plans to issue a debut sovereign bond, just weeks after then Finance Minister Uhuru Kenyatta had said that the country was “definitely going ahead” with the plans. Having planned to issue a $500 million international bond this year to obtain some hard currency reserves in the wake of the shilling falling against the dollar and a widening current account deficit, the country was forced to backtrack.

Joseph Kinyua, permanent secretary in the finance ministry, said that the issuing of the bond had been delayed because the money could take too long to materialise. Kenya will instead raise $600 million from international banks as they seek more favourable interest rates. The ministry is currently in the process of finalising the programme, with a consortium of foreign banks set to share the loan. “If we’re able to get money from outside at cheaper rates than we have from local banks, it will help ease the funding pressure,” Kinyua said. Interest rates in Kenya jumped in the final quarter of last year by a total of eleven percentage points to 18 per cent.

Yet some analysts were have not been convinced by Kinyua’s argument. There is an alternative argument that Kenya was concerned that investor demand for a sovereign bond might be relatively low with elections on the horizon. Any demonstration of a weak appetite towards Kenya’s first Eurobond would damage the country’s image as a solid investment. The government says plans for a sovereign bond may be revived next summer, but given the swift change of heart this time round there is no guarantee.

Though Morocco seems to be targeting investors in the Gulf, they may be better placed targeting their own diaspora. Diaspora bonds are a hot topic right now. World Bank and International Monetary Fund figures put remittances from Africans abroad to the continent at between $25 billion and $34 billion a year. Unrecorded informal flows of remittances were most probably at least a third of this amount. Launching diaspora bonds would allow the continent to leverage this money more aggressively and innovatively for development. This is a model that has been employed with some success in Israel and India in the past, and could yet prove to be the way forward for Africa too.