A WAVE of military takeovers in African countries has sent ripples through international markets, impacting bond prices and intensifying apprehensions among investors. This trend of coups is just one of the challenges facing the continent, which is already grappling with debt crises, geopolitical tensions, and the growing threat of climate change.
The coup in Gabon, led by Gen Brice Oligui Nguema, marked the eighth military takeover in Africa since 2020. Unlike previous coups, Gabon stood out due to its substantial bond issuance in international capital markets and a recent debt-for-nature swap, which added complexity to the situation.
This coup had immediate consequences, with Gabon’s bonds plummeting by 10 percent. However, the shockwaves extended beyond Gabon, affecting other countries as nervous investors sought to identify potential risks in the region. Cameroon, Gabon’s neighbour, witnessed a similar drop in bond prices, and the tremors even reached countries like Senegal and the Republic of the Congo.
Investors are increasingly cautious about political instability in Africa, and the fear of coups has contributed to rising borrowing costs for many African nations. Sergey Dergachev, a portfolio manager at Union Investment, observed that nearly all markets in the region are experiencing higher costs of debt.
A study conducted by the United Nations Development Programme (UNDP) in July highlighted the severe economic consequences of coups. It estimated that the 2008 coup in Guinea and the 2012 coup in Mali collectively wiped out $12bn to $13.5bn from the two nations’ economies over a five-year period, representing a substantial percentage of their GDPs.
The coup in Gabon also had implications for the interest rate premium, or ‘spread,’ in JPMorgan’s multi-country ‘Nexgem’ Africa index, which has not fully recovered.
Investors have grown increasingly cautious, adopting a ‘sell first, think later’ approach when coups occur. Eamon Aghdasi, a sovereign analyst at investment firm GMO, emphasised the worst-case scenario for bondholders is the possibility of a new government repudiating previous debt.
Credit ratings for countries experiencing coups are often downgraded. Fitch and Moody’s issued downgrade warnings for Gabon after the August 30 coup, and similar actions were taken for Burkina Faso, Mali, and Niger.
While Gabon has yet to face significant sanctions following the coup, other countries have not been as fortunate. Sanctions, halted international support, and disruptions in debt repayment are among the potential consequences of coups.
Despite these challenges, some analysts suggest that if Gabon successfully makes its first bond payment post-coup, bond spreads may further ease, signalling a more stable future for the country.
However, concerns about sovereign stability across Africa continue to loom large. The Fragile States Index (FSI) for 2023, published by nonprofit organisation The Fund for Peace, classified 46 African countries as at least somewhat unstable.
Even in nations considered solid democracies, such as Kenya, investors are cautious due to the general risk aversion that could increase the cost of issuing new bonds.
In this environment, the African continent faces a multifaceted challenge, combining debt, geopolitical uncertainty, climate vulnerability, and political instability, as investors carefully monitor developments in the region.