African sovereigns walk slippery debt path

While stronger African economies are keen to issue Eurobonds to global markets, lured by low interest rates and optimism about vaccines, risks remain for weaker countries that are seen not to be distancing themselves from some Covid-19 debt relief packages. 

Investors seem spooked by uncertainty over what debt relief could mean for repayments of private bonds and African sovereigns that urgently need money but have weaker credit ratings may have to think twice.

A world flush with cash is hunting higher-yielding investments and demand is good for Eurobonds issued by governments with good economic management and stronger international credit ratings (B and higher). 

In addition, some African countries are showing good recoveries from the economic effects of the pandemic, with rapid bounces back to levels seen at the start of 2020. 

On 13 January, Benin (rated B+/B by Standard & Poor’s and Fitch) raised €1bn ($1.2bn) made up of $849m in an 11-year Eurobond at 5.125%, and $364m with a 31-year bond at 7.25%, one of the few African Eurobonds with a tenor of over 30 years. 

It attracted nearly $3.6bn in bids from 125 investors and some of the proceeds will be used for early repayment of a Eurobond due in 2026.

Investors queue up for Egypt bonds

In February, Egypt (rated B+/stable) issued $3.75bn of bonds in three tranches to finance the budget deficit. According to reports, 40 investors were queuing up, with $16.5bn to offer. 

The sale was $750m in five-year bonds on a yield of 3.875%, $1.5bn in 10-year bonds on an 5.875% yield and $1.5bn in 40-year bonds yielding 7.5%, better for the issuer than the initial estimated rates. 

The global pandemic has crushed Egypt’s tourism industry and foreign direct investment, both major sources of hard currency. The advisors on the Eurobond include Citi, First Abu Dhabi Bank and Goldman Sachs. Egypt had also raised $750m in September 2020 by issuing five-year green bonds. 

According to Mohamed Abu Basha, Head of Macroeconomic Research at EFG Hermes: “It’s a good time for the issuance, considering the drop in yields over the past few months and the positive outlook for emerging markets this year.”

Côte d’Ivoire was the first government in sub-Saharan Africa to raise debt on international bond markets after the pandemic, with a €1bn ($1.2bn) 12-year Eurobond on 25 November. The country is rated B+/positive and the issue was oversubscribed five times and achieved a record low yield of 5.0%. 

Morocco raises $3bn

Morocco (highly rated, although on 23 October Fitch cut the rating from BBB- to BB+) raised $3bn on 9 December in three tranches: $750m with a maturity of seven years (and coupon of 2.375%), $1bn maturing after 12 years (coupon 3%) and $125bn in 30-year debt (coupon 4%). 

This was managed by Barclays, BNP Paribas, JP Morgan and Natixis. Demand totalled $13bn from 480 investors, according to the Ministry of Economy and Finance, and followed a “NetRoadshow” by economy minister Mohamed Benchaaboun with the international investor community.

On 24 September, before the rating cut, Morocco had also issued a €1bn ($1.2bn) bond in two equal tranches. A five-year tranche (with a coupon of 1.375%) was issued at a yield to maturity of 1.495% and a 10-year tranche (coupon 2%) at yield to maturity of 2.176%. 

South Africa (last November Fitch had downgraded it from BB/Negative to BB-/Negative and Moody’s from Ba1 to Ba2) may even be strong enough to avoid the foreign currency risk of raising money on international markets in 2021 after surprisingly strong tax receipts. 

Treasury may achieve a surplus of R45bn-R100bn ($3.1bn-$6.8bn). The yield on domestic Treasury bonds has fallen dramatically since March 2020 and this could mean it can afford to raise debt only in the domestic market. 

Kirean Siney of ETM Analytics said: “While the international debt market is an attractive financing option given the low rates, Treasury will be cautious of the FX risk attached to issuing foreign currency debt.” 

The last foreign bond was $5bn in 2019, and in 2020 South Africa focused on international borrowing from the IMF and multilateral banks. In February, South Africa’s President Cyril Ramaphosa said he could see signs of an economic recovery but warned it would be “uneven”, with many people out of their jobs.

Debt relief spreads contagion 

Weaker countries suffering the debilitating effects of Covid-19 on their economies may find that treatment, in the form of some debt-relief packages, brings its own contagion and leads to credit downgrades.   

In late January, Ethiopia’s Finance Ministry said it would use the “Common Framework” initiative of the G20 group of advanced countries announced last November. This extends the previously agreed Debt Service Suspension Initiative (DSSI) to ask private lenders to agree to the same concessions as government lenders.

Prices of an existing 10-year Ethiopian government Eurobond immediately fell in secondary market trading, from roughly $1 to under $0.92 per $1 nominal value of debt. 

Contagion spread to trading in debt from Cameroon and Mozambique, seen as likely to have similar issues. 

Lower prices mean investors were demanding higher interest rates and anticipate higher risk. On 9 February, Fitch downgraded Ethiopia’s long-term foreign-currency issuer default rating from B to CCC and Standard & Poor’s also downgraded.

According to Fitch: “The G20 CF (Common Framework), agreed in November 2020 by the G20 and Paris Club, goes beyond the DSSI that took effect in May 2020, in that it requires countries to seek debt treatment by private creditors and that this should be comparable with the debt treatment provided by official bilateral creditors. 

“This could mean that Ethiopia’s one outstanding Eurobond and other commercial debt would need to be restructured, potentially representing a distressed debt exchange under Fitch’s sovereign rating criteria. There remains uncertainty over how the G20 CF will be implemented in practice.”

Jan Friederich, Head of Middle East and Africa sovereign ratings at Fitch, said the agency will probably downgrade any country that uses the new framework if private sector borrowers are affected: 

“There is a lot of push from the public sector (major governments and the IMF) for countries to use these instruments which are being offered. We have had interactions with the official side that showed clear frustration about the lack of private sector involvement.”

However, Ethiopia’s downgrade may also reflect domestic issues, including a civil war and emerging news of massacres in Tigray region, spiralling ethnic violence in other parts of the country and border clashes with Sudan. World Bank and other funders could hold back if more details emerge about atrocities. 

Countries that do not use the Common Framework are not likely to be affected. Ratings agency S&P Global said it would continue “case by case assessment”.  

Adding to the worries, Zambia defaulted by missing a $42.5m coupon payment on a Eurobond last November. Its ability to negotiate with creditors was hampered because the government could not reveal details on its extensive Chinese borrowing. 

On 27 January, the IMF announced that Chad was the first to ask officially for debt structuring under the framework but it does not have any Eurobonds or other publicly-traded debt.