Merchants gamble on Africa’s ‘Wild West’ Eurobond market

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Within the ever-changing African Eurobond market, Cyprus-based dealer Simbarashe Jindu briefly pauses amid a busy buying and selling day. Regardless of challenges posed by the 2020 pandemic and up to date international political shifts, the secondary marketplace for shopping for and promoting African debt stays sturdy. It’s fuelled by Eurobond issuances from African governments and firms, drawing in a global mixture of brokers, merchants, and asset managers. The market reacts shortly to info or hypothesis, typically sparking swift commerce surges to capitalise on alternatives or to cut back potential losses.

“For lack of a greater phrase, it can be just like the Wild West,” says Jindu. 

“It’s not a spot the place most individuals commerce, as a result of sub-Saharan Africa (SSA) is among the extra risky areas within the Eurobond market. Nevertheless it attracts these in search of larger yields, as in comparison with different rising market (EM) papers like Saudi Arabia, yields in SSA are 3% larger and extra.” 

Merchants in African debt deal with the “unfold” – the yield distinction between these bonds and a benchmark, typically US Treasury bonds. This metric is essential, spotlighting the perceived threat and potential return of investing in African debt versus the extra secure, lower-yield US bonds. A wider unfold signifies larger threat with potentialities of bigger returns, whereas a narrower unfold suggests decrease threat and extra modest returns.

“Some bonds are oversubscribed or underbought even throughout defaults. Such anomalies sign when a bond is buying and selling a lot larger or decrease than anticipated. By inspecting these particular bonds, merchants can anticipate larger buying and selling values post-restructuring. Ghana is buying and selling low 40s to the greenback, however submit restructuring these bonds would possibly commerce as a lot as 50, in order that’s only a threat you’re taking,” says Jindu.

As international central banks start to ease off their tightening cycles, a resurgence of curiosity in bonds is noticeable as borrowing prices lesson. But, formidable challenges persist, and the door to new issuance has remained shut for sub-Saharan Africa all through 2023. Constrained by excessive rates of interest, international trade volatility, and chronic inflation, solely Egypt and Morocco, ordinary issuers in North Africa, have managed to boost international capital from the continent this yr. 

Eurobonds supply governments flexibility – compared to the many years of conditional loans – however they arrive with steep prices, excessive yields (5% to 18%), and shorter maturities, sometimes round 10 years. 

This monetary construction poses sustainability points, with international locations together with Nigeria, Kenya, Angola, Egypt, and Ghana allocating a considerable portion of their tax revenues to curiosity repayments. In Nigeria, over 80% of federal income is consumed by debt repayments, a development the IMF expects to succeed in almost 100% by 2026.

Investor enthusiasm

Since South Africa’s inaugural Eurobond issuance in 1995, the African Eurobond market has witnessed profound progress, with participation from over 21 international locations by 2023. This growth mirrors the continent’s pressing demand for capital to gas infrastructure growth and handle important imports. As of the third quarter of 2023, the face worth of African sovereign Eurobonds stood at $142bn, with a market worth of roughly $125bn, illustrating the market’s robustness, says Gregory Smith, writer of The place Credit score Is Due, and lead economist on the World Financial institution.

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The market’s attract is additional emphasised by investor enthusiasm. A survey carried out by The Worth Change signifies that 76% of asset managers plan to extend their investments in African debt. This sturdy curiosity highlights the potential of the continent’s monetary devices.

But Africa’s Eurobonds current a posh narrative of each success and warning. Whereas international locations like Zambia and Ghana face ever-present challenges because of the misuse of capital amid international financial slowdowns and commodity value crashes, others like Rwanda display the optimistic affect these monetary instruments can have when managed successfully.

Rwanda’s inaugural Eurobond issuance in 2013, totalling a modest $400m, stands as a testomony to fiscal accountability, says Smith. This represented about 5.1% of its GDP on the time, a determine that has since declined to round 3% of its 2023 GDP, owing to the nation’s regular financial progress. 

The success of this bond is attributed to its clear allocation of funds, with important parts invested within the Kigali Conference Centre, RwandAir, and the Nyabarongo hydropower venture. Regardless of international financial challenges, these tasks have flourished, contributing to Rwanda’s infrastructure and financial growth.

“There are a whole lot of classes to be realized from this primary spherical of borrowing from the continent,” Smith tells African Enterprise. “My view is that this hasn’t been a mistake, however accessing the markets has received to be executed higher. There are some international locations who’ve borrowed an excessive amount of like Ghana, which tapped the Eurobond market too closely. And for others they didn’t align the usage of proceeds to spend money on particular tasks.”

In 2021, Rwanda continued to indicate its adeptness out there by issuing a second Eurobond for $620m at a decrease rate of interest, utilizing a part of the proceeds to refinance the preliminary bond, a strategic transfer that demonstrated the nation’s rising sophistication in debt administration.

The teachings from Rwanda’s expertise are clear. Eurobonds, whereas providing important growth finance, demand prudent administration. Missteps throughout instances of disaster can result in crippling debt, worsening credit score scores, and rising rates of interest, probably foreclosing future Eurobond issuances.

The story of Mozambique’s 2013 “tuna bond” serves as a stark reminder of the dangers concerned. By no means paying a single coupon and ultimately declared unlawful, this bond, which was purported to finance a tuna fishing fleet, led to an enormous enhance within the nation’s public debt – from lower than 50% of GDP in 2013 to 140% by 2016. The scenario was worsened by undisclosed authorities borrowing and graft. In the present day, Mozambique’s remaining Eurobond, maturing in 2031, has seen its coupon charge balloon from 5% to 9%, including heavy weight to the annual curiosity burden.

Different funding sources

Now, with African international locations confronting challenges in debt markets, some are actively searching for different funding sources.

Progressive financing strategies, together with social affect bonds, inexperienced bonds, and diaspora bonds, are being explored. This strategic shift goals to diversify funding mechanisms and scale back Eurobond dependency. 

“I believe some sovereigns are pivoting away or are having a pause from the Eurobond market, as they will must do issues a bit in another way, maximising concessional lending, and for others it’s lesson is to make use of the markets a bit extra broadly and rethink the technique,” says Smith.

“For individuals who haven’t received massive maturities coming they can fairly simply sit this one out and watch for the climate to alter. You probably have massive maturities coming then you will have to return again to the markets or conjure up a plan B, and that’s what Kenya’s doing proper now.”

Approaching the debt wall

On the yr’s shut, the maturity “debt wall” looms massive, presenting itself as an intimidating obstacle to growth, with Zambia, Egypt, Ethiopia, Ghana, Kenya, and Tunisia dealing with urgent repayments in 2024 and 2025, amid financial strife.

Zambia’s $4bn debt restructuring, hindered by November’s creditor disagreements, highlights the restrictions of Lusaka’s declining choices in debt refinancing, whereas the worth of copper, their main export, stays stubbornly low.

Egypt, burdened with a $100m reimbursement obligation, grapples with fiscal pressures, whereas Ethiopia navigates restructuring below the G20 Frequent Framework amidst civil conflict and pandemic fallout.

Ghana, within the throes of its worst financial disaster, works in direction of restructuring $13bn in Eurobond debt after defaulting.

Kenya faces a possible crunch in June 2024 with a $2bn Eurobond due, as the federal government scrambles for reduction by fiscal moderation. Tunisia’s financial disaster is compounded by imminent Eurobond maturity and difficult IMF negotiations.

For a few of Africa’s debt issuers, it can look as if their foray into international capital market entry has been the case of 1 step ahead, and two steps backwards, with a return to the crippling debt disaster they battled on the flip of the century.  

However for Yvette Babb, an EM fastened earnings portfolio supervisor at William Blair, an funding financial institution and funding administration agency, the forecasts for debt restructuring and the basic well being of the market is broadly optimistic.

“For those who have a look at the African Eurobond area at an index degree, so taking the JP Morgan EM bond index (EMBI) international diversified African unfold ranges as an combination, they clearly are on the upper facet from a five-year perspective,” she says.

“We foresee 2023’s challenges evolving into 2024’s alternatives, particularly in fastened earnings asset lessons. Nations with main exterior financing wants, like Egypt and Kenya, are more likely to see decreased refinancing considerations, due to assist from growth companions, each multilateral and bilateral. And within the broader context, SSA presents a typically optimistic risk-reward steadiness – the excessive spreads now seem to sufficiently, typically even overly, compensate for the dangers related to these international locations skills and intentions to repay Eurobond money owed,” says Babb.

The monetary panorama, as soon as characterised by low international charges and slim spreads earlier than 2020, has transitioned to a tighter regime, but one unlikely to duplicate 2023’s extreme tightening in 2024, in response to Babb. This shift alleviates considerations over imminent debt maturities however highlights the need for structural adjustments in financing methods. Anticipating dearer business financing, these international locations at the moment are tasked with re-evaluating their borrowing approaches and prices, confronting restricted entry to business bond markets and escalating considerations about debt sustainability.

Regardless of these challenges, the continent’s trajectory isn’t solely outlined by impending austerity. “We’ve seen outstanding progress and social progress in Africa during the last twenty years, pushed by reform and funding, with Eurobond markets enjoying a big position,” says Smith.


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