In March even hardcore frontier-market investors raised eyebrows when tiny Benin, part of the West Africa CFA Franc Economic and Monetary Zone (WAEMU) dominated by Ivory Coast and Senegal, which previously issued abroad and borrow heavily from China, floated a €500 million (US$559 million) eight-year bond at a 6% yield. It came as overlapping commercial and bilateral obligations elsewhere on the African continent are in repayment trouble, most notably in Zambia, which owes US$1 billion in external debt this year, equal to international reserves on hand as it tries to forge a new International Monetary Fund arrangement.

Benin’s inaugural sovereign ratings were in the speculative “B” category, with Fitch pointing out that more than 6% growth in gross domestic product from cotton and cashew exports was offset by poor development indicators and weak diversification and external accounts. For two decades the country of 11 million with $11 billion in output has been under IMF programs, as it breaches the regional 3%-of-GDP fiscal-deficit target.

The IMF’s March report on WAEMU common policies pointed out that budget and current-account gaps were increasingly funded through Eurobonds rather than regional central bank loans and the Abidjan-based government bond market. Public debt approached 55% of GDP and servicing one-third of revenue in 2018, and local bond “structural impediments” include the lack of primary dealers and a single supervisor and depository.

The global banks that led Benin’s offering wished to extend long-standing Francophone Africa relationships and tap favorable temporary high-yield appetite, but ignored the domestic backstop needed to ensure ultimate liquidity and sustainability. China has focused on big-ticket infrastructure projects like a $500 million dam in Ivory Coast, as the Belt and Road sub-Saharan push is potentially squeezed by missing internal financial market development as a parallel priority.

Ivory Coast and Senegal Eurobonds in 2018 did not lift international reserves to the recommended five-months-imports range. The current-account gap for the region was almost 7% of GDP on negative terms of trade with oil import demand, and the Fund found “shrinking room for maneuver” to avert debt distress. The average tax revenue/output ratio for the eight-member group, which includes conflict- and terror-prone Burkina Faso, Mali and Niger, was up only 1% the past decade to 15%. The original public-debt ceiling was set at 70% in the aftermath of the 2000s HIPC (heavily indebted poor countries) official relief program when concessional financing dominated, but a 10% lower sustainability threshold is now recommended.

Banks in the region are phasing in Basel III prudential standards over five years, as annual credit growth remains in high single digits and concentrated on the public sector. Three large banks could not meet the new capital minimum, and bad loans were almost 15% of the total in mid-2018.

A repo market does not yet exist to support short-term funding needs and broader bond transactions. Ivory Coast is projected to grow 7% annually over the medium term aided by state enterprise restructuring, and its debt strategy envisages a two-thirds/one-third regional-external split. However, over the past two years the latter has been the main channel and foreign debt increased to 30% of GDP, and in net present value terms the debt distress trigger is close with the repayment profile, the IMF warns.

Senegal has only a Fund policy support program, but it too was admonished about vulnerabilities after “breaches” in debt-to-export measures and missing information on total liabilities, including to Chinese creditors under showcase road and stadium projects. President Macky Sall easily won re-election in February after opponents were disqualified, as critics and investment-house research raised questions about off-budget financing.

Countries in the zone have long promised simple improvements to the regional bond market such as aligning auction and syndication approaches, eliminating multiple regulators, and creating a private insurance and pension fund institutional base, but progress stalled amid recent access to global fixed-income investors. The Benin deal was a wake-up call that the zone may have leverage and functional cracks. International issue underwriters, and Chinese officials working to develop bond market at home, could work with sovereign borrowers to fix them or face inevitable backlash with harmed relationships. In Zambia, Chinese banks and companies are losing out with new mining-deal demands, and beyond the inaugural issue headlines the CFA Franc zone could soon join the debt-renegotiation wave.