African countries (apart from South Africa) are set to place $7 billion of debt this year, buoyed by low interest rates and a huge global appetite. According to this article in Bloomberg Businessweek by Roben Farzad, this year’s debt issues will be more than the previous 5 years combined and African capital markets are feeling the boom.
No wonder international investors who are “grabbing for yield and growth” (according to Farzad) are looking to Africa which the International Monetary Fund forecasts will grow at 5.6% this year against 1.2% in developed countries. But Africa’s terrible infrastructure, including electricity, bridges, roads and wastewater treatment, is costing African sat least 2 percentage points of growth. Some of the new bond proceeds are likely to go on infrastructure, which needs investments of up to $93 billion a year.
The article cites research from JP Morgan Chase that average yields on African debt fell 88 basis points in the past 12 months, to 4.35%. “Nigeria, Gabon, Ghana, Ivory Coast, Namibia, the Congo, Senegal, and the Seychelles have all seen their borrowing costs fall this year.”
“It’s a hugely exciting story,” Jim O’Neill, the chairman of Goldman Sachs Asset Management who plans to retire this year, said in an April 23 interview with Bloomberg Television in London, writes Bloomberg reporter Chris Kay: “The only thing one has to be a little bit careful of are many of those markets are still very undeveloped and suddenly there’s a lot of people around the world regarding Africa to be sort of fashionable and trendy.”
Farzad wonders how easy it will be to “service so much easy-money debt when the credit cycle turns, or if commodities and political stability decline. At least for now, though, you get the impression that sub-Saharan Africa has turned a corner in global capital markets.” And journalist Chris Kay quotes Charles Robertson, global chief economist at Renaissance Capital: “For governments, great, don’t look a gift horse in the mouth. I still don’t believe investors are getting risk-adjusted returns in the dollar-bond space.”
According to Kay, debt-forgiveness programmes have helped 45 African nations cut debt to about 42% of gross domestic product this year from an average 120% in 2000, according to data compiled by Bloomberg and IMF estimates. South Africa’s Finance Minister Pravin Gordhan says debt will peak at 40% of GDP in 2016, compared with more than 100% for the U.S. and an average 93% in the eurozone.
Another reason why Africa offers lower risk is that taxpayers have no expectations of massive social and other spending in nearly all countries. Meanwhile global appetites are shown by the $20 trillion reportedly invested in debt at less than 1% yield.
Some potential issues
Nigeria planning to offer $1bn in Eurobonds and a $500m Diaspora bond, according to Minister of State for Finance Yerima Ngama. It was recently included in JP Morgan and Barclays local bond indices. Yields on the existing $500m Eurobond, due 2021, were down to 4.05% by 3 May, from a peak of 7.30% in October 2011.
Kenya really boosted investor confidence in Africa with its peaceful outcome after elections on 4 March and the Finance Minister Robinson Githae said on 11 March they could be in line to issue up to $1bn by September.
Ghana fuelled by an oil boom, has seen its debt yields on the 10-year bonds down 3.43 percentage points to 4.82% since their issue in October 2007, said Bloomberg.
Zambia successfully raised $750m last year at 5.625% and is thinking to return for another $1bn. Yields were up 20 basis points to 5.66% by 3 May.
Tanzania has asked Citigroup to help it get a credit rating before issuing a maiden Eurobond of at least $500m. Finance Minister William Mgimwa said a total of $2.5bn was bid for a private offering of $600m of Government debt in March. According to this story on Reuters that bond’s pricing and structure at the time had shocked markets and appeared to benefit investors: “The cheaply priced US$600m seven-year private placement was described as a “disaster” by one banker. And certainly the immediate secondary market performance looked terrible. The bonds jumped 2.75 points on their first day of trading.. That works out at a cost to the government of US$4m a year in coupon payments, assuming that the bonds could have priced at the tighter level.”
Angola did a private sale of $1bn in debt in 2012 and will go for $2 billion this year, according to Andrey Kostin Chairman of VTB Bank OJSC, who helped arrange the first issuance, last October.
Mozambique and Uganda may also issue foreign currency bonds of $500m each, according to Moody’s last October.
Gabon’s $1bn of dollar bonds are down 4.78 percentage points to 3.13% since they were issued in December 2007.