Attractiveness of African Sovereign Bonds
Jan 30th 2013
Until recently, access to global financial markets was very limited for most African countries. In the 1990s, only South Africa, Morocco and Tunisia had regular access to international capital markets. However, since the latter half of the 2000-2010 decade, there has been a growing impetus for a number of countries to tap into international capital markets to raise funds for development. Gabon and Ghana first participated in international capital markets in 2007, while the Democratic Republic of Congo undertook a debt exchange in the same year. From 2011, there have been at least four issuances with the Zambian bond placement in September 2012 the latest.
Zambia, which has a credit rating of B+, raised US $750 million from a 10-year Eurobond at 5.6 per cent against the initial guidance of 5.9 per cent. The country planned to issue US $500 million, but this was upped in response to huge demand amounting to US $11.9 billion. The Zambian bond issue is considered cheaper relative to issuances by highly rated advanced economies such as Spain, rated BBB- (US $4.9 billion at an average 5.3 per cent). It also follows other debutant issuers – Namibia, Nigeria and Senegal – whose issuances were offered in 2011.
In October 2011, Namibia raised US $500 million on a 10-year bond with yield of 5.5 per cent. Earlier, Nigeria (January) and Senegal (May) raised US $500 million each from international capital markets. Like the Zambian case, each of these issuances was oversubscribed, attesting to the growing attractiveness of the African debt market.
Zambia’s hugely successful debut bond issuance has been touted by analysts as opening up opportunities in Africa’s bond debt market, particularly for the below-investment grade fast-growing economies. Funds raised from issuance of sovereign bonds would provide countries with much-needed resources for critical infrastructure development projects.
Over the medium and long term, Moody’s rating agency expects other countries to issue their inaugural Eurobonds. Kenya’s planned issue of a 10-year US $1 billion Eurobond could come as early as 2013. Nigeria has also announced intentions to issue a Eurobond for US $1 billion aimed at financing its distressed energy sector. Other countries with intentions to enter international debt markets are Angola, Rwanda, Tanzania, Uganda and Mozambique.
Drivers of African bonds’ issuance – Africa’s perspective
International bond markets provide an avenue for African countries seeking financing when domestic resources and official development assistance are inadequate to meet their substantial needs of economic and social infrastructure.
Financing economic and social infrastructure: Africa’s investment needs for infrastructure development in various sectors amount to about US $90 billion a year. However, only US $60 billion can be met from the countries’ own resources and multilateral development banks. This leaves a funding gap of US $30 billion annually. In order to meet this gap, African countries could tap into innovative financing sources, including issuance of debt instruments in international capital markets. Acute shortage of social infrastructure in health and education also entails raising additional resources. In this regard, the Zambian government has committed four per cent of the US $750 million raised from the bond issuance to finance health projects.
Current global economic context: Excess liquidity created by quantitative easing has flowed to emerging and frontier primary bond markets, fuelling a record inflow of capital to these regions. Some estimates show that the current global economic environment could see emerging markets issue a record US $400 billion of debt instruments. Year to date, emerging countries have issued US $314 billion, a third higher than the amount issued over the same period last year. It is against this background that some analysts attribute the success of the Zambian bond issuance to perfect timing in a turbulent time when investors’ appetite for emerging market assets has increased amidst low returns in mature markets.
Drivers of African bonds’ issuance – International investors’ perspective
Africa’s favourable economic conditions and improving political environment offer opportunities to foreign investors seeking better returns on their investment placements. These are mitigating factors against low-rating positions for some of Africa’s fastest-growing economies seeking funding from international markets.
Africa’s economic, political and social potential: With the exception of South Africa, the African continent has long been neglected by global financial markets, largely due to perceived political risk, and weak economic performance. However, during the past decade, Africa has made substantial progress in improving political and economic governance. Africa now boasts robust average GDP growth, low debt ratios, abundant natural and human resources, among other potentialities. These factors have led to a reassessment of Africa’s risk configuration by global investors and opinion-makers in an environment characterized by uncertainty.
Appetite for yields and diversification benefits: Emerging markets are increasingly issuing debt instruments on global markets, taking advantage of benign conditions prevailing in these markets. The increase in debt issuance by developing countries especially in Africa has chiefly been underpinned by relatively high risk-adjusted yields. Global investors inclined to diversify their asset portfolio are attracted by favourable yields offered by African assets, discounting the risk of low ratings for many of these countries. By purchasing African sovereign bonds, global investors are endorsing the region’s buoyant economic prospects.
Professor Mthuli Ncube is the Chief Economist and Vice President of the African Development Bank, and holds a PhD in Mathematical Finance from Cambridge University, UK, on “Pricing Options under Stochastic Volatility”.