The “Tuna Bond” Effect

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In January 2017, the Mozambican government defaulted on a $59.8 million payment on a $850 million sovereign bond that was organized by Credit Suisse and Russian bank VTB Capital. The bond, meant to establish a state owned fishing company, was used, in part, to build ships for the Mozambican navy. The default comes amidst a larger credit crisis for the Mozambican government which is also indebted to the International Monetary Fund (IMF). Unfortunately, Mozambique’s problems may create problems for other African economies. 

Known as the “Tuna Bond,” it highlights the many issues of credibility that the Mozambican government now faces. On top of this default, the IMF has found that Mozambique failed to disclose nearly $1.4 billion in debt prior to the IMF’s most recent loan. Because of this, the country continued to borrow and issue debt despite having an extremely high debt to GDP ratio

The first African bond default since 2011 has many investors worried. Bloomberg’s risk models suggest three other Sub-Saharan sovereigns could potentially default on their loans in the coming years: Senegal, Ghana, and Zambia. This broader fear, and lack of trust in sub-Saharan markets could lead investors to make more risk-averse decisions. Unfortunately, this comes on the heels of already downward trends in sub-Saharan investment.

Downward Trend

The early parts of the decade saw a drastic increase in sub-Saharan debt issuance’s which culminated in 2015. The region issued nearly three times the amount of sovereign debt it issued the previous three years from 2013-2015. Totaling $18.1 billion, the region issued over $6 billion a year on average in that time span. In 2016, sub-Saharan Africa issued just $2 billion from only two countries, South Africa and Ghana.

This downward trend is due to two factors: 1) High coupon rates; and 2) Lack of international interest. In the case of Ghana’s recent bond issuance, the government guaranteed a 9.5 percent yield. The high 9.5 percent rate is not uncommon for African issuers at the moment (South Africa is an outlier in this respect), and many African sovereigns can’t afford that high of a debt burden. International interest in African debt has declined as investors have looked for less risky opportunities. Mozambique’s default does not help to restore investor confidence in African debt markets.

Who Could this Affect?

The “Tuna Bond” effect could almost immediately impact Ghana’s ability to attract further investors; larger economies like Nigeria could also be affected. This February, Nigeria issued the first sub-Saharan sovereign bond of 2017. (The billion dollar bond was issued in Euros.) However, Nigeria continues to have a significant hole in its proposed budget. As such, the country has looked to issue debt in several different denominations and forms, even an Islamic sukuk. All of these efforts failed. It is likely that Nigeria will continue to look for further financing. But, fears that the Nigerian government may not be disclosing all of their numbers, based on investor experience in Mozambique, could drive up bond rates for any future Nigerian issuance’s.

Kenya has also shown interest in issuing international debt in the near future. So has Tanzania, which has ambitious borrowing plans to develop the country’s infrastructure, including a possible $800 million Eurobond this year. The executive director of research at the Bank of Uganda recently commented that for “Uganda to reach middle-income status by 2020 and become a prosperous and modern (nation) by 2040… will be driven by public investments. For that to happen, Uganda’s debt has to increase.” However, investor uncertainty due to the “Tuna Bond” will likely mean that Kenya, Tanzania, and Uganda will all have to take on debt with higher interest rates.

There are many African countries that are developing infrastructure and diversified economic sectors. These projects have often been funded by international bonds. Unfortunately, many international investors tend to view different African governments and markets with the same lens. As such, the current financial crisis in Mozambique threatens the ability of African countries to raise the funds necessary for these projects. At the very least it will likely cause an increase in the interest rates of any bond across the African continent.

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What is the African Growth and Opportunity Act?

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On May 18, 2000, Congress signed the African Growth and Opportunity Act, commonly known as AGOA, into law. AGOA is a trade program meant to establish stronger commercial ties between the United States and sub-Saharan Africa. The act establishes a preferential trade agreement between the U.S. and selected countries in the sub-Saharan region. Initially approved for fifteen years, AGOA was reauthorized for ten years on June 25, 2015, by the Obama administration. In its current form AGOA will last until September 30, 2025.

It is important to emphasize that AGOA is a preferential trade agreement and not a free trade agreement. A free trade agreement is a treaty between two or more countries to establish a free trade area where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances. A preferential trade agreement is a trade pact between countries that reduces tariffs for certain products to the countries who sign the agreement. While the tariffs are not necessarily eliminated, they are lower than countries not party to the agreement. It is a form of economic integration. The U.S. Department of Commerce describes AGOA as the “most liberal access to the U.S. market available to any country or region with which the United States does not have a free trade agreement.” AGOA in part was meant to establish a route for the U.S. to develop free trade agreements with certain African markets; however, this has yet to happen.

What is AGOA’s purpose?

Within certain sectors, AGOA is often looked at as a form of aid to developing countries. The U.S. government’s website says that it is “helping millions of African families find opportunities to build prosperity.” However, this image of trade as a form of aid is not entirely accurate. When needed, AGOA has provided the U.S. with preferential access to valuable commodities such as oil. AGOA has also served as a bargaining chip for the United States.

The trade relationship between the U.S. and sub-Saharan Africa has nearly always been skewed one way: the U.S. imports far more than it exports. AGOA didn’t change this. If anything, it increased the scale. U.S. exports to sub-Saharan Africa peaked in 2014 at $25.49 billion. The numbers for American imports are much higher, they peaked at $86 billion in 2008. (U.S.-Africa trade of products under AGOA reached its pinnacle in 2008 when it hit $66.3 billion.)

 

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Those import numbers directly reflect American commodity needs. At the peak of American imports, between 2007 and 2008, the U.S. imported over one million barrels of oil a day from Nigeria alone. This is in direct contrast to the drastic drop in oil imports by 2015, when there were periods that the U.S. imported no oil from Nigeria. This trend affected other sub-Saharan oil producing countries as well. (The period between 2014-2015 represents the only time that the trade balance between the U.S. and sub-Saharan Africa was nearly even.)

AGOA is also a very useful negotiating tool. The U.S. president has the ability to rescind access to AGOA to any country if he were to determine that it is not working toward certain goals. In essence, the U.S. president has the ability to cancel the AGOA relationship with any partner nation if he feels that it doesn’t benefit the United States.  

Most recently, AGOA was used as a negotiating tool just prior to its reauthorization in 2015. At the time, the South African government refused to let American chicken farmers export chicken products to South Africa. Accused of “dumping” low quality chicken products, the United States had not been allowed to export chicken to South Africa for over fifteen years. The South African argument was that American exports would destroy its local poultry industry by undercutting prices. On the American side, it was argued that this ban was a barrier to U.S. trade and investment. It was also argued that South Africa, with its advanced economy (though stalled), didn’t need a preferential trade deal (this goes back to the development side of AGOA). The renewal of AGOA, and South Africa’s inclusion in the renewed act, became questionable due to this one sticking point.

In the end, the South African government conceded and allowed the U.S. to export 65,000 tons of chicken products to South Africa. Trade with the United States was too important for South Africa to risk losing over chickens, especially as the U.S. is South Africa’s second largest export market. (South African exports to the U.S. in 2015 were valued at $9.1 billion. They consisted mostly of manufacturing materials, metals, and minerals.)

AGOA under the Trump Administration?

Based on the Trump administration’s largely anti-trade stance, there has been some worry that AGOA may possibly be on the chopping block. This, however, is highly unlikely. AGOA was passed originally by a republican congress in 2000, and was just reauthorized in 2015. It still maintains broad support across party lines, and even if targeted by the Trump administration, it is unlikely that Congress would approve its repeal.

AGOA is also not likely to be targeted for repeal because it is not a free trade agreement. While certain African goods are given preferential deals that reduce tariffs, sub-Saharan countries do not operate with blanket free trade and zero tariffs. In fact, the deal provides the U.S. with access to African goods and commodities that help drive the U.S. economy.

Additionally, it would be foolish of the Trump administration to give up a tool that provides the U.S. with so much negotiating leverage. As evidenced by the South African chicken trading incident, the U.S. government is able to use access to American markets to dictate trade opportunities in Africa. Countries like Kenya have already expressed worries that trade access through AGOA could be restricted. Traditionally, sub-Saharan Africa as a whole has critical problems with intra-state trade that increases dependency on large foreign trade partners. This regional trade gap provides greater leverage for the United States when participating in trade negotiations.

While it is doubtful that AGOA will be repealed, I would not be surprised if the new administration were to use the threat of removal from AGOA as a negotiating tool. Presidents have removed nations from the AGOA agreement before. The Trump administration doesn’t mean the end of AGOA, but it may mean that certain trade relationships are reevaluated.  

*For more information on AGOA visit https://agoa.info/.