Stylized facts and lessons from West Africa’s Eurobonds
by John Mbu
Debt, particularly foreign currency debt, has become an important source of development finance for West African economies. In the suite of foreign debt, Eurobonds (bonds issued in currencies other than those of the originating country and/or company) are the most prominent. In 2006, Seychelles was the first Sub-Saharan African country, aside from South Africa, to make its foray into the international financial markets with the issue of its $200-million Eurobond. Since then, several other Sub-Saharan African countries have issued Eurobonds with values generally ranging from $200 million to $1 billion. Most of those issuing countries are in West Africa (Ghana, Senegal, Nigeria and Côte d’Ivoire). The total value of yearly issues of Eurobonds by West African governments rose from just about $200 million in 2007 to $2.25 billion in 2014, as illustrated in the figure below. Meanwhile, the total cumulative value of all Eurobond issues over the same period stands at $8.2 billion.
Worthy of note is the fact that, as is illustrated in the figure above, some West African countries have tapped the international markets more frequently than others. Ghana has tapped the market four times (in 2007, 2013, 2014 and 2015), Senegal has gone to the market thrice (in 2009, 2011 and 2014), while Nigeria and Côte d’Ivoire have issued Eurobonds twice (in 2011 and 2013, and in 2014 and 2015, respectively). Investor interest, particularly from the US and Europe, to take up these West African bonds has been very high to the extent that almost all of these issues have been oversubscribed. Senegal’s $500-million bond in 2014 and Côte d’Ivoire’s $750-million bond in 2014 were eight times oversubscribed.
The keen investor interest in West Africa’s bonds can be explained as follows: it rests on the sub-region’s promising economic growth (5%+) and macroeconomic stability over the past decade, but also on the record low interest rate levels in the US and in the international financial markets, as a whole. The latter has come about in a bid by Western Central Banks to stimulate their ailing economies. These low interest rates therefore motivated investors to look for more profitable investments away from their home markets, such as these West African countries’ Eurobonds, which offered far higher yields (interest rates) than those offered in developed markets.
Eurobonds have become a very significant source of development finance, particularly infrastructure funding, for West African countries and more of these will be issued in the near future, either by the four countries above or by any other country that has never been to the market before. These issues should not, however, be in the next two or three months as the markets are presently somewhat volatile, particularly as a result of China’s economic slowdown, the general economic malaise in emerging markets particularly Brazil, Russia, Turkey and South Africa, and the December 2015 increase in the US base interest rate. The interest rates paid for any bond issued now will definitely be significantly high. This, at least in part, explains the slowdown and/or drop in the number of issues in 2015 so far.
With this in mind, West African nations that intend to issue Eurobonds should ensure that the proceeds from the bonds are used to finance productive investments and not channeled to finance fiscal budget deficits. The relatively high interest rates (10.75%) paid by Ghana for its October 2015 Eurobond are a reminder that funds raised in international financial markets are costly and ought to be used for intended purposes that yield high returns, thus leaving budget deficits out of scope. In addition to the fact that Ghana’s currency, the cedi, has also lost over 30% of its value this year, its fiscal deficit has expanded from 8.3% of GDP to 10.5% between 2009 and 2014. Meanwhile, Ghana’s government debt (as a ratio of GDP) doubled in the same period.
Closely related to the above is the fact that the markets “rewards” countries whose macroeconomic frameworks are relatively stable. Senegal has paid lower interest rates for each subsequent Eurobond – from 9.25% in 2009 to 8.75% in 2011 to 6.25% in 2014 – as its fiscal deficit has remained the same at 7.9% of GDP between 2009 and 2014. West African nations such as Côte d’Ivoire, Ghana and Nigeria, which have tapped the international markets, as well as those that are still to do so, should work hard towards reducing their fiscal deficits and stabilizing their macroeconomic frameworks as a whole. These countries should also create good institutional frameworks for debt management, as Nigeria has done with the creation of the Debt Management Office some years ago. The West African Economic and Monetary Union (WAEMU) also recently set up a regional agency – Agency UMOA Titres – to support the issuing and management of sovereign bonds.
The US dollar has been appreciating in value for over a year now, and is not expected to reduce in value in the next at least 12 months. The plunge in commodity prices has also drained countries’ international reserves, thus reducing the stock of funds for monthly Eurobond interest payments. This context warrants some words of caution. First, in the medium-term, countries should also watch out as “threats of foreign and domestic currency denominated debt mismatches are real”, as outlined in a recent analysis by the AfDB’s Acting Chief Economist and Vice-President. Second, West African nations wanting to issue Eurobonds will therefore have to use financial risk management instruments such as derivatives (options, currency swaps) that will prevent the nominal values of the bonds from rising. The risks of international currency borrowing are high as opposed to those of local currency borrowing even though the latter usually have relatively short maturity periods (about five years), which is a potential source of liquidity risks. Countries should therefore continue developing their domestic financial markets, in order to enable them issue bonds in local currency. This will be a long term hedge from the risks of international currency borrowing. Finally, it is important to point out that prudent borrowing, either in the domestic or international markets, is essential in maintaining macroeconomic stability and promoting growth.
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