Cost of Africa coup contagion fears
Cost of Africa coup contagion fears
The Impact of Coups on African Economies: A Lively Look at the Financial Fallout
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When Gabon’s General Brice Oligui Nguema ousted his distant cousin in a coup last month, he joined the long list of military leaders who have taken power by force in Africa since 2020. However, what made this coup different was the fact that Gabon had recently sold a significant amount of bonds on international capital markets and had just finalized continental Africa’s first debt-for-nature swap.
The repercussions of the coup were felt not only in Gabon but also in neighboring countries like Cameroon, as nervous investors scanned for signs of instability. This trend of coups, coupled with other major concerns such as debt crises, geopolitical tensions, and vulnerability to climate change, has deterred many investors from Africa.
According to a UNDP study conducted in July, previous coups in Guinea and Mali wiped off a combined $12-$13.5 billion from the two countries’ economies over a period of five years. This represented a significant portion of their respective GDPs. The study highlights the economic impact of political instability on these nations.
Scores of coups and attempted coups have occurred in recent decades across the globe, from Thailand and Ecuador to Egypt and Turkey. In response, investors in these markets tended to sell first and ask questions later. Gabon’s coup not only hurt its bonds but also increased the interest rate premium, or ‘spread,’ that investors demanded to hold bonds in JPMorgan’s multi-country “Nexgem” Africa index.
Cameroon was particularly affected, with its bonds losing more ground than Gabon’s following the coup. President Paul Biya, who has ruled Cameroon for over 40 years, has faced crackdowns and contested elections and aims to have his son take over.
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Senegal and Congo Republic have also come into focus. President Macky Sall of Senegal recently ruled out running for a third term after violent unrest, while rumors of an overthrow in Congo Republic arose while President Denis Sassou Nguesso was in New York for the U.N. General Assembly. These instances further highlight the uncertainty plaguing the continent.
“There’s a lot of eyeballs on this coup theme right now,” said Eamon Aghdasi, a sovereign analyst at investment firm GMO. The worst-case scenario for bondholders is a new government coming in and repudiating the previous government’s debt. Fortunately, there is no indication that Gabon’s new leaders plan to do so, although bond payments have faced difficulties in other countries like Niger.
Coups typically lead to credit rating downgrades. Following the August 30 coup in Gabon, agencies like Fitch and Moody’s put the country on a downgrade warning. Burkina Faso, Mali, and Niger have also experienced rating downgrades in the aftermath of coups. Surprisingly, Thailand remained unaffected by two coups in the last two decades, demonstrating that different regions face varying consequences.
“Coups, in general, in Africa or anywhere else, can cause problems for debt repayment partly because of the potential for sanctions,” explained Ravi Bhatia, an analyst at S&P Global. Additionally, vital international support can also be jeopardized.
Despite the political turmoil, Gabon, a country characterized by significant inequality, has yet to face sanctions, unlike Mali, Guinea, Burkina Faso, and Niger. Moody’s cited the rise in oil prices and Gabon’s membership in the Central African Monetary Union (CFA franc) as factors for withholding a full downgrade. Although the panic among investors has eased, the recovery of Gabon’s bond spreads remains uncertain.
Simon Quijano-Evans, chief economist at Gemcorp, suggests that if Gabon successfully makes its first post-coup bond payment on time next month, bondholders might view it as a positive change away from long-term single leadership. However, concerns about sovereign stability across Africa persist. The “Fragile States Index” published by non-profit The Fund for Peace rates 46 African countries as at least somewhat unstable, highlighting the challenges facing the continent.
Even in countries like Kenya, considered a solid democracy on the other side of the continent, general risk aversion among investors could increase the cost of issuing new bonds.
In conclusion, the recent trend of coups in Africa has added to the existing concerns deterring investors from the continent. The economic impact of political instability can be significant, with substantial losses observed in GDP and credit ratings. Sanctions and loss of international support further exacerbate the challenges faced by countries experiencing coups.
While Gabon’s coup has affected its bonds and increased interest rate premiums, there is hope for recovery if the new government remains committed to honoring its debt. However, concerns about sovereign stability across Africa remain, influencing investor sentiment and the cost of issuing new bonds.
It is crucial for African countries to foster stability, strengthen democratic institutions, and address the underlying issues that contribute to political unrest. Only then can they attract the investments needed to drive sustainable economic growth and prosperity for their people.
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