The Many Unknowns of African Government Bonds
Until a few years ago, the financial markets for government bonds were almost precluded from the countries of Sub-Saharan Africa. Today, however, many states in this part of the continent are issuing sovereign bonds.
- Monday, 23 March 2015
These countries obviously include Nigeria and South Africa, which boast the most developed capital markets in the macro region, but there is also a growing trend in bonds among the countries with levels of capitalization that are significantly lower than Sub-Saharan Africa’s two most developed economies.Countries such as Zambia, Gabon, Ghana, Senegal, Angola, Tanzania, Ethiopia, Rwanda and Namibia are demonstrating a particular dynamism in the issuance of sovereign debt, as can be seen by the 7 billion dollars’ worth of African bonds issued in 2014, according to data published by the market research company Dealogic.
In the global context, Africa today is in second place behind Asia in terms of economic growth, with 11 countries among the top 20 economies in terms of GDP growth. Even the most recent estimates of the World Bank forecast that in 2015 the GDP of Sub-Saharan Africa will remain stable at last year’s level of 4.6% but by 2017 it will reach 5.1%.
This forecast has been confirmed by the latest Ernst & Young report “Africa 2030: Realizing the possibilities”. The global network of professional auditing services analysed how the exponential growth in Africa’s trade with the rest of the world and the huge investments by foreign companies have laid the foundations for the economic development of many African countries.
There are many motivations for those interested in investment in African economies. Firstly, the evolution of the capital markets in Africa has coincided with a historic low in interest rates across the developed world. The lack of interesting opportunities for profit elsewhere has encouraged investors to look towards the African markets.
These markets, however, are part of a high-risk context both from the point of view of volatility and also due to their economic foundations. The risks are outlined by the debt ratings assigned to the sixteen countries of the sub-Saharan area by ratings agency Standard & Poor’s, which, with the exception of Botswana and South Africa, classified all of the African States at a level below investment grade with scores of between BB- (with a negative outlook in the long-term) and B-.
We should not forget the presence in the region of tangible difficulties for the activation of structural long-term productive processes, even without taking into account questions of security and political instability in many of the region’s countries, which have been subject to sudden and unexpected changes of leadership in the past.
It is also worth adding that recent market trends have predicted external factors that will be significantly less favourable for the countries of Sub-Saharan Africa. First of all, the historic low level of interest rates in the United States looks set to rise within the next 12 months. This means that the foreign investors’ willingness to take risks, although remaining high will wane as global interest rates rise and growth rates fall.
Another element that could have a negative effect on African markets is the fall in the price of crude oil, which dropped last Monday to 43 dollars per barrel (WTI), its lowest level since Spring 2009. Consequently, for many African states whose economies are closely connected to the energy sector, cheap oil risks having a significant negative effect on state revenues.
In spite of all of the above, the race to issue government bonds in Sub-Saharan Africa continues at breakneck pace, as can be seen by the success of the latest bond sale in Ivory Coast. In spite of the back story of the country’s debt default in 2011, at the end of February this year the Ivory Coast government raised one billion dollars from institutional investors through the issuance of bonds with an average maturity of 12 years, with three equal annual repayments due in three instalments in 2026, 2027 and 2028, and a yield of 6.625%.
This bond issuance in US dollars was the Ivory Coast treasury’s second: the first was held last July when 750 million dollars worth of ten-year bonds were issued with a yield of 5.625%, which has risen today to 6%. On this occasion too the demand for the Abidjan government’s bonds was far greater than expected: the bond sale received around five billion dollars in bids, six times the quantity on offer.
Prior to purchasing sovereign bonds of Sub-Saharan countries, investors should take note that nearly all of African debt, with the exception of some South African corporate debt in euro, is held in US currency. Although it is true that the dollar has almost reached parity with the euro, making investments in dollars an interesting proposition, it is necessary to consider the high volatility of the exchange rate. Investors should proceed with a level of caution.
In order to provide a more detailed picture, last month the African Development Bank (AfDB) launched the AFMISM Bloomberg® African Bond Index (ABABI), which will track sovereign debt and provide credible and transparent reference parameters. The ABABI will offer investors a tool capable of measuring and monitoring the progress of the African bond markets.
Stefan Nalletamby, the director of Financial Sector Development at the AfDB, explained on the organization’s Website, “This collaboration comes at a time when African countries are increasingly looking to domestic capital markets to source financing for economic development”.
There are, therefore, valid grounds to believe in a new way forward, no longer based on international aid and crippling debts, but on government bonds that the African governments, just like their western counterparts, will repay at a later date in exchange for interest on the principal. Such a substantial injection of liquidity could turn out to be useful to finance infrastructure projects in many African countries.
Translated by Nicholas Neiger