Africa’s new debt binge: What are the risks?

Global investors are keen to buy the eurobonds being issued by African sovereigns, but could growing debts presage a return to the bad old days?


Five African countries are currently experiencing problems in servicing their debts, according to the IMF.

Nonetheless, recent eurobond issuances by African countries have been met with huge interest. A major reason for this is that “Africa has the highest sovereign eurobond yield in the world, at 6% compared to 5.5% for emerging markets and 4% for developing nations in the Asia-Pacific region,” says Ibrahim Sagna, director and head of advisory and capital markets at Cairo-based African Export and Import Bank (Afreximbank).

“A supportive global backdrop, positive emerging market sentiment and yield-hungry investors means that African policymakers would be missing a trick by not capitalising on the attractive current rates on offer by international markets,” adds Ronak Gopaldas, director at Signal Risk, a consultancy.

Take the case of Senegal’s $2.2bn eurobond issuance in early March. The West African sovereign got more than $10bn in bids. Such is the interest that in mid-March Ghana upped its ambition: it now wants to issue a $2.5bn eurobond, $500m more than announced by its finance minister, Ken Ofori-Attah, in February.

And what does the sovereign need the money for? It wants to use $1bn to fund its 2018 budget and the extra $1.5bn to refinance existing foreign debt. Similarly, South Africa is expected to tap the dollar debt market for as much as $3bn soon. In mid-January, Angola also unveiled plans to issue a $2bn eurobond this year, as part of a broader economic plan.

African sovereigns that already have dollar accounts credited this year from eurobond issuances are Egypt, Nigeria, and Kenya. In mid-February, Egypt issued $4bn in eurobonds. With bids of $12bn, three times the amount sought, the authorities issued bonds of three tenors: a five-year tranche at 5.58%, 10-year tranche at 6.59% and 30-year tranche at 7.9%.

Just months before, Egypt secured a three-year $12bn loan from the IMF, in addition to $7bn in eurobonds raised in 2017. What did Egypt need the money for? To boost its foreign exchange reserves, is the official response. And judging from plans revealed by Egyptian authorities in September 2017 to sell at least $10bn in eurobonds this year, there is likely to be another $6bn worth of issuances, including a likely euro-denominated one, before end-2018.

Five times oversubscribed

In the same month as the most recent Egyptian issuance, Nigeria also sold a $2.5bn eurobond at yields of 7.1% on the 12-year tranche and 7.7% on the 20-year tranche. Orders were about $12bn; almost five times the principal amount on offer. Three months earlier, the West African sovereign had issued its third foreign currency bond of 2017, securing as much as $11bn in orders, almost four times the two-part $3bn issuance.

The Nigerian authorities have been clear on what the money from the dollar debt would be used for: to fund the 2018 budget and refinance existing debt. Of particular interest is the refinancing of the government’s local currency debt. Considering the potential foreign exchange risk, the plan is understandably controversial, although lower naira yields in the aftermath have vindicated the fiscal authorities’ position thus far.

In the same month of February, Kenya sold a $2bn eurobond at yields of 7.25% and 8.25% for the 10-year and 30-year tranches respectively. The issuance came just weeks after a credit rating downgrade by Moody’s and revelations that the IMF had for months blocked the authorities from accessing a much-celebrated $1.5bn emergency facility over disagreements on the authorities’ fiscal consolidation plans.

Despite all this, the sovereign received $14bn in bids, seven times the amount on offer. Investors were also clearly unfazed by what was still a delicate political situation in the country and unresolved allegations that the proceeds from its $2bn debut eurobond issue some four years earlier were misappropriated.

Put together, thus far this year to mid-March, African countries have issued some $11bn in euro­bonds, just $7bn shy of total issuances last year. In light of warnings by the IMF and a loan default by Mozambique to a foreign bank in 2017, a cautious reception to these latest issuances would not have been unusual.

Investment case is strong

Judging from the order books, however, investors could not care less. They are not being irrational. African sovereign debt defaults remain the exception, not the norm; at least, not since the Paris Club of debtors forgave the predominantly African highly indebted poor countries (HIPC) about $40bn in debt in 2005. When you add in the juicy yields, some argue, the investment case is a no-brainer.

These new African eurobond issuances are aimed at securing what are still very attractive yields, as America’s Federal Reserve Bank continues on a monetary tightening path, with at least three interest rate hikes expected this year alone. Other global central banks have also signalled that the end of their quantitative easing programmes is in sight, with the Fed already ahead in paring its bond purchases.

So some of the new eurobond issuances by African sovereigns are pre-emptory. But a chunky portion of these issues are for the refinancing of existing debt, in foreign and local currencies. Some are also motivated by political ends, as incumbent governments race to complete projects ahead of crucial elections.

Verner Ayukegba, principal analyst for sub-Saharan African economics and country risk at London-based IHS Markit, thinks that some of the issuances are also aimed at “diversifying revenue away from oil and other resources (in the cases of Nigeria, Angola, and Ghana for instance) in light of their price volatility in the international markets.”

Regardless of the motivation, however, the risks are the same. If caution is not exercised, the debt binge could eventually take African countries back to the dark days of old when almost all of some countries’ public revenue was used to service debt. With some African countries already devoting at least half of their annual revenue to servicing debt, this is not a far-fetched scenario.

So fears about debt sustainability are quite germane. “Sustainability will depend on a country by country basis; Congo and Mozambique have shown the limits with defaults,” says Ayukegba. “Nigeria seems to still have a better chance due to better diversification in its economy and relatively lower debt to GDP,” he adds.

Examining the risks

So in general, is there cause for concern? Afrexim­bank’s Sagna is conditionally optimistic: “If African sovereigns make effective use of the captured proceeds, there is a confluence of events which may just lay the basis of aligned interests. After all, the continent’s credit story is improving nicely after years of slow deterioration, and this growing appetite from global investors may have just found a quite hospitable home.”

Signal Risk’s Gopaldas adds a note of caution: “[Since] this is primarily a ‘search for yield’ play [for international investors] rather than a domestic one, any major change in the global economy from its current ‘Goldilocks’ scenario could drastically alter the equation and see debt servicing costs spike. If investors become more discriminatory with their capital, the spotlight will shift more to country-specific issues – here countries with ‘bad politics and bad economics’ could be in the firing line. Authorities would therefore be well advised to guard against complacency.”

Rafiq Raji

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