The uncertain political climate in the country does not bode well for improving the economy. A default on payments recorded in the regional market could permanently tarnish Bamako’s financial reputation.
Mali recorded a default on payments in the regional financial market of Huemoa a few weeks ago. Although this incident was mentioned in the economic papers, it nonetheless had little impact and attention given its short and long term impact on the Malian economy.
According to the idea of the self-proclaimed pan-Africanists, chauvinism is attached to the body by all means, because Africa has a land rich in raw materials, it is able to create wealth and develop. There is nothing less certain: this causal relationship has not been established. Raw materials, of course, are needed, but not enough; one should also be able to transform them. To imagine that they guarantee wealth is to ignore the capital (funds) and the work required to transform them.
Financial capital appears to be as important to African countries as raw materials.
IN Wealth of NationsIn a major work on which classical economics is based, Adam Smith analyzes the origins of the prosperity of countries such as England. He distinguishes between different factors of production: land, which is owned by landowners who receive rent in exchange for exploitation rights, which they cede to farmers; work provided by the population; financial capital used to purchase the working tools necessary for the processing of raw materials and to pay workers.
Thus, finance capital appears to be as necessary as a raw material for African countries seeking to move from a rentier economy to a productive and wealth-creating economy. ceteris paribus. To mobilize this financial capital, states resort either to tax revenues or, when these are insufficient, to debt. Since African countries, as everyone knows, have low financial resources and limited ability to collect debts, it is actually debt that is usually recommended.
Public debt financing is often carried out in financial markets through the issuance of debt securities. However, an indispensable condition for this operation is the financial rating of the state. It gives an estimate of the solvency of the debt issuer (here the state) and provides information on its terms of access to capital, such as the cost of financing, the level of coverage and attractiveness. Very often, a government’s financial rating is also required to rate any other debt issuer, such as companies and communities under its jurisdiction.
Rating agencies evaluate the remittances of labor migrants to the country of origin
In practice, financial rating agencies rely on a set of macroeconomic indicators: the dynamics of economic activity, measured by GDP growth, the inflation rate, public debt, measured by the debt/GDP ratio and the debt/tax revenue ratio… For emerging market and developing countries, rating agencies also assess available foreign exchange reserves; and transfers of funds from immigrant workers to their country of origin.
In an unprecedented post-pandemic macroeconomic environment, countries’ financial ratings depend even more on their economic and political stability. From an economic standpoint, growth projections for African countries are modest as most of these countries suffer from public debt and excessive inflation inherited from the management and effects of the covid-19 pandemic.
Fitch Ratings recently downgraded the financial ratings of countries such as Rwanda and Ghana, despite the growth in economic activity. This situation makes it difficult to raise the capital (high risk premium) needed to finance investments that are vectors of wealth creation.
Investors, including Africans, are not sensitive to political ideologies
Therefore, the issue of financial rating deserves close attention. in the countries of the West African subregion subject to heightened political instability. This applies to Mali, where untimely led to a default of payments in the regional financial market. All other financial markets will remember this failure for as long as it takes.
Pan-Africanist statements will change little: investors, including Africans, are not sensitive to political ideologies. Regardless of whether the current unrest in the country is justified or not, the financial rating takes into account not only political and institutional stability, that is, the quality of state institutions, compliance with legal norms and the preservation of the rule of law. but also the government’s compliance with its financial obligations over the past few years.
Performance is a key metric used by rating agencies to determine the financial standing of a country issuing debt securities. In 2011, no country rated AAA, AA and A by Fitch Ratings, with the exception of Poland, defaulted on its foreign currency debt during the period 1991-2011.
To believe that in Mali, in the end, supposedly restorative political turmoil can turn destructive. Either way, this has noticeable immediate costs.