Exhilarated financial markets are detached from economic reality and fears of another sub-prime time bomb are inevitable. The crisis is currently brewing - most likely, not where it was last time - U.S-securitized mortgages and Euro crisis - that nearly brought down the global banking system in 2008 and 2010.

The latest annual report from the Bank for International Settlements (BIS) and the Basel-based forum for the world's major central banks, seem pretty convinced that global debt markets are once again in risky territory and heading for a fall.

Despite a shaking in developing economies over the past year, appetite has been brisk for the more exotic debt of recent defaulters and bankrupt nations such as Greece, Cyprus, Ecuador, Argentina and Jamaica, as well as Sub-Saharan Africa countries such as Kenya, Uganda, Malawi, Ghana, Nigeria, Mozambique, South Sudan and Zambia.

New debts from high-risk 'frontier' nations such as China, Russia and India, for example, hit a record $16.3 billion for the first six months of this year. According to Reuters, the welter of new bonds sold in recent years by African nations just over a decade after multilateral debt forgiveness were "Africa's subprime." But even though potentially worrisome for poorer countries seeking 'no strings attached' borrowing instead of cheaper concessional lending or slower foreign direct investment, the scale of debt involved is nowhere near levels marking a systemic threat for the global financial system. Zambia’s unbearable budget to feed its own people with multiple borrowing both internally and externally is a good example.

The red flag put by BIS, then, is the risk of higher interest rates as seen with the central banks intervening frequently in the market to avert the escalating exchange rate risks and other related risks by selling dollars which is characterized as economic artificial fixing for short term gains. The sustainability of this process will ultimately be put to the test when interest rates normalize. The inevitability of rates rising from next year suggests that investors should brace for some serious turbulence. Many still believe that central banks will hold off until the last minute because underlying economies will remain sub-par for years to come as a result of aging demographics and the relentless pay down of past debts, and that with inflation subdued, rates will likely only rise modestly even when they do go up.

Multiple borrowing in Sub-Saharan Africa is thrice its current debt threshold with a new wave of borrowing from the Chinese Investment banks that are considered to have cheaper terms. The Government of Kenya is auctioning a 12-year bond worth 20 billion Kenyan shillings ($229 million) with a fixed coupon of 11 percent. Uganda is issuing a 180 billion Uganda Shillings bond. The Uganda government signed investment guarantees with the Chinese banks for the construction of Karuma Dam making the outstanding debt of $ 5.8 billion. Other countries have developed a high borrowing appetite from the Chinese banks to cushion the looming financial deficits in their home countries to finance the infrastructure budgets. Malawi is expected to borrow from China, India and South Africa.

Last year too, emerging stocks, bonds and currencies fell as investors fretted about lower growth in countries such as Brazil and China and the end of the U.S. Federal Reserve's monetary stimulus program, which had depressed U.S. bond yields and driven volatile investor flows to high-yielding assets. Due to this, the BRICS countries have decided to create a development bank to help developing countries.

Security worries in Kenya, South Sudan, Mozambique, DRC, Chad, CAR, and Malawi are likely to see long-term investors pull money out after the deadly attacks in those countries. In Kenya, the tourism industry - a big earner of foreign exchange - may suffer some damage especially if governments warn their citizens against travelling to the East African country. Tourism is Kenya's second-largest source of foreign exchange after agriculture and accounts for just over 10 percent of GDP. It earned $1.2 billion last year and employs 150,000 in a country hard up for jobs, but the sector remains vulnerable to security threats.

Uganda, Rwanda, Burundi, Tanzania, DRC and South Sudan are feeling the pinch of the Al-Shabab attacks in Kenya since it has affected the trade and tourism industry in those countries because Kenya is the centre of tourism in the region. Insecurity will remain a key business risk in Sub-Saharan Africa with the new wave of terrorist attacks.

The Bank of Uganda’s revocation of the Global Trust Bank’s operation license for the loss of 60 billion Uganda shillings and the grounding of Air Uganda due to safety and maintenance loopholes by the Civil Aviation Authority has seen staff lose their jobs. Uganda had capital outflows of 1.05 trillion Uganda shillings in 2013/2014 due to dividend payment by the foreign companies to their shareholders. All this is going to trickle down to the rural poor as Uganda Revenue Authority is mostly likely to declare a decline in tax revenue collection for the month of August and other subsequent months in 2014.

Meanwhile, the premature suggestions that the 'Africa Rising' narrative might lose momentum as a slowing China economy depresses prices for commodities such as copper, and the run-down of the U.S. Federal Reserve's bond-buying programme squeezes the flow of cheap capital into emerging markets is a clear indication that Sub-Saharan Africa is doomed to fail if the Chinese banks pump a lot of money to the governments which have exercised high levels of corruption, financial indiscipline and economic distortions.

Can the Sub-Saharan African states strengthen the macro-economic fundamentals that buffered them against the effects of the world financial crisis between 2007 and 2011? They will have to be more careful on how they borrow, strengthen domestic debt management, invest and deal with corruption. They will also have to tackle internal conflict. Apart from addressing challenges ranging from poverty, food insecurity, climate change challenges, health risks, rural urban migration, unemployment, poor service delivery, nepotism, and negative ethnicity among others, Sub Saharan African governments must build resilience to capital outflows, commodity price shocks, strong economic disciplines, debt management and focus on rural service delivery to reduce the burden on their health, agriculture and education budgets.

By James Odongo
odj2james@gmail.com