By Corneleo Keevy, Head Credit Risk Management at Ashburton Investments
One of the key issues to be discussed at the World Economic Forum Africa gathering this week is the ongoing development of capital markets in Africa. This matter has been discussed over the last number of years and has gained importance as it is seen as a key source of future funding for the continent.
Following the global financial crisis, sub-Saharan African sovereigns capitalised on an era of low interest rates and the global search for yield by issuing US$-denominated Eurobonds to international investors at attractive spreads.
There are currently 15 countries in sub-Saharan Africa which have issued Eurobonds, with a total market capitalisation of c.US$30bn. Eurobond issuance by sub-Saharan African sovereigns peaked in 2014 amounting to US$8bn. The growth in this market provided benefits to sub-Saharan Africa in the form of increased diversification in funders and sources of funding. The increased focus by global investors on sub-Saharan Africa resulted in growing interest in the local capital markets as well, assisting in the further development of these markets.
During 2016, however, issuance declined to US$5bn, with South Africa accounting for US$4.25bn of the total issuance. Ghana was the only other entity in sub-Saharan Africa to issue a Eurobond in 2016, amounting to US$750m.
The decline in Eurobond issuance from sub-Saharan African sovereigns was driven mainly by reduced risk appetite from global investors leading to rising yields, making it less attractive for sovereigns to issue bonds. This was primarily as a result of low commodity prices, especially oil. This in turn resulted in weaker exchange rates which increased the costs to service the US$-denominated debt instruments. Furthermore, liquidity shortages in foreign currency placed additional strain on sovereigns to service hard currency denominated obligations. Nigeria and Ivory Coast, were some of the sovereigns which delayed issuing Eurobonds during 2016.
Ghana was the first country to be impacted by the above events to the extent that it approached the International Monetary Fund (IMF) for financial assistance in April 2015. The IMF provided 3-year emergency funding which is due to last until April 2018, however Ghana is currently in negotiations to extend the programme to at least December 2018. During January 2017, Mozambique became the first sub-Saharan African sovereign to default on its recently issued Eurobonds when it was unable to service the coupon payment on a bond which is guaranteed by the government. Mozambique is currently in negotiations with the IMF for financial assistance. Finally, Zambia has also been impacted by low copper prices and other challenges to its economy resulting in it approaching the IMF for final assistance, which is currently under negotiation.
Despite the problems experienced by certain sub-Saharan African sovereigns, there has been renewed interest in Eurobonds over recent months.
Yields on bonds have reduced on the back of improved commodity prices and a renewed search for yield from global investors. Nigeria was the first sovereign to take advantage of the lower yields, issuing US$1bn in February 2017 and raising and additional US$500m in March 2017. Other countries to have expressed interest in issuing Eurobonds during 2017 include Ivory Coast, Senegal and Kenya.
South African investors have the ability to earn attractive US$-denominated returns when investing in sub-Saharan African sovereign Eurobonds, especially when compared to the South African Eurobond. However, there are a number of factors to take into account when comparing the returns including liquidity in the instrument, the underlying credit quality of the sovereign and the ability of the sovereign to service US$-denominated debt.
In most cases, the issuers of sovereign Eurobonds in sub-Saharan Africa remain economies which are highly exposed to commodity prices. This results in demand for investment into the capital market instruments currently in existence being cyclical and dependent on global investor sentiment. The development of sustainable local capital markets will require international investors to take a long-term view on the underlying economies. Until such time as these countries have successfully diversified away from a dependence on commodities it will remain challenging to attract the required level of investment into local capital markets.