African eurobonds – An enchanted path to prosperity?

Two decades ago, African indebtedness was a major issue internationally and in 1996 a World Bank initiative extended to Highly Indebted Poor Countries (HIPCs) saw a slew of debts accumulated by corrupt and incompetent regimes written off to contribute the current resurgent growth Africa now enjoys.

Notwithstanding, perhaps due to amnesia on the part of some African governments or perhaps having been emboldened by newfound oil or gas reserves and the seemingly inexhaustible Chinese demand for raw materials or alternatively, just taking advantage of the benign environment for borrowing, there seems to be a surge in African bond issue and, there’s no shortage of investors ready to lend money to African states.

This observation is backed by articles in the FT, The Economist and international credit rating agencies which suggest that bond investors sick of low yields in developed markets are looking far afield for better returns for their funds and they are looking beyond the traditional alternatives e.g. BRICS to sub-Saharan African states where the expectation is that more will issue eurobonds – (Foreign currency denominated debt).

It’s said there’s an ill-wind that blows nobody any good and certainly the recessionary winds blowing through the developed economies and the extraordinarily loose monetary policies enacted by various central banks to jumpstart growth are frustrating fund managers seeking higher returns to pay a growing number retirees.

While central banks, in search of growth which continues to elude the world’s major economies, have shied away from burying money in mines to be dug up by unemployed miners as suggested by Keynes or dropping money out of helicopters as suggested by Friedman, their monetary stance has nevertheless, been extraordinarily dovish.

In the United States apart from the near zero interest rates (currently at 0.25%), Ben Bernanke’s stimulus program currently injects about 85 billion USD monthly into the US economy. Likewise in Europe the story is of negative to no growth brought about by intrinsic problems of some ailing states struggling with debt.

In its efforts to jumpstart growth in the Eurozone and prevent ailing economies from keeling over, the ECB have not only kept interest rates low (0.75%) for many quarters but have intervened to keep the costs of borrowing low through EFSF/ESM, LTRO and recently the threat of vehicles like “OMT” Outright Monetary Transactions, of which Mario Draghi has warned has “no ex ante quantitative limit to the interventions”.

In the United Kingdom, the Bank of England has maintained low rates currently at 0.5% and has gone through several cycles of QE (Quantitative Easing a euphemism for printing money) is committed to inject a total of £375 billion into the economy through asset purchases and have also held rates low for several quarters.

Japan, which for 15 years has been plagued by slow growth and deflation, has a new BOJ Governor, Haruhiko Kuroda who is largely expected to boost monetary easing to get the Japanese economy out of the doldrums and achieve the government’s inflation target of 2%.

Apart from the weakening of currencies and exporting inflation, these initiatives have had the impact of pushing the equity markets, such as the DJIA, to multi year highs as many investors withdraw their money from low yielding treasuries and move into equities. The foreseeable interest rates in these major economies have not only flat lined but, some central banks, like the BOE, have even mulled on negative interest rates leaving beleaguered bond investors little choice but to cast their nets afar for better yields and many of these investors are finding themselves at the shores of Africa.

A Moody report from October 2012 notes that access to international capital markets for African countries has been limited because of multilateral and bilateral financing which at the end of 2011 made up about 75% of public and publicly guaranteed external debts in Africa.

But that’s changing as the same report expects issuance of African sovereign debt to rapidly increase to meet needs for financing long term infrastructure worth about 90 billion USD annually.

While Fitch finds only South Africa and Namibia debt investment grade, other sub-Saharan states like Nigeria, Ghana, Kenya and Angola have also gained stable and positive ratings and are issuing eurobonds. Because of higher yields obtainable and because African public debt obligations are still relatively miniscule when compared to some developed economies, some European and American fund managers seeking higher returns (as opposed to low yields from US Treasuries and other developed markets) are reacting positively to African debt.

The Economist reports that Zambia’s $750M 10 year debt yielding 5.4% received $12 billion worth of orders from European and American fund managers – 16 times oversubscribed. Seizing the moment, and brushing aside the stringent requirements for a rating prior to issuing eurobonds, the Tanzanians came to the market in February issued a $500M 7-yr amortizing bond in a private placement, which was also oversubscribed.

The FT also notes that the markets are eagerly awaiting a Rwandan issue to raise $350 million for investment in infrastructure against a backdrop a report from Fitch credits Rwanda with “solid economic policies” and “macroeconomic stability” it would come as little surprise if this too was oversubscribed.

The long dated eurobonds are providing these African states with access to crucial funding for infrastructure projects, without the traditional strings that come with IMF loans. But, there are risks. The debt and repayments are dollar denominated and although this may be sustainable in an era where the dollar is relatively weak, the status quo may change if the FED’s monetary stance shifts.

Secondly, most of these African countries issuing debt have natural resources such as oil, natural gas or some other commodity whose recent high prices have boosted government revenues to make the coupons. However, in a depressed commodity market, deficits could balloon.

Thirdly as noted by The Economist, fiscal discipline is still a “work-in-progress” in Africa and despite the stringent checks many African countries are still a long way down the World Bank Doing Business ranking (Rwanda 52, Zambia 94, Tanzania 134) and Transparency International holds a similar ranking (Rwanda 50, Zambia 88, Tanzania 102).

This statistic brings to mind another country, Greece, which was low on the global transparency index and borrowed cheaply and heavily after joining the Euro in 2000 to invest in infrastructure, only to find a decade later that their unrestrained borrowing and spending combined with mismanagement and improper accounting had put the frighteners on investors who began demanding ruinous rates of interest.

It must be said that there’s no evidence to suggest the recent placements of foreign currency denominated debt by African countries would lead to a similar situation as in Greece, but there are parallels and this could perhaps serve as a lesson.

Nevertheless, if these borrowings are used to invest in capital projects, to strengthen and improve economic diversity, create growth, build and maintain infrastructure, encourage private industry and innovation through investment in science and technology, then these countries may indeed be on an enchanted path to economic prosperity and higher per capita GDP.

Lloney Monono
Bristol, Uk

Categories: Finance

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