Sierra Leone Recovery Sends Yields to Record Low Level

Source: London Mining Plc via Bloomberg

African Minerals Inc. and London Mining Plc, both based in London, began iron-ore exports in late 2011. Close

African Minerals Inc. and London Mining Plc, both based in London, began iron-ore exports in late 2011.

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Source: London Mining Plc via Bloomberg

African Minerals Inc. and London Mining Plc, both based in London, began iron-ore exports in late 2011.

Sierra Leone, the African nation rebuilding its economy a decade after the end of a civil war, is benefiting from slower inflation and a stable currency as borrowing costs tumble and growth accelerates.

Yields on 91-day notes fell 128 basis points, or 1.28 percentage point, to a record 6.42 percent at the last central bank auction May 9, 134 basis points higher than South African yields and down from 19.1 percent in December after the central bank cut interest rates. The Finance Ministry forecasts growth in the $3 billion economy of 15.1 percent in 2013 after last year’s 21.3 percent, which was bolstered by the start of iron-ore exports and construction including the expansion of the airport serving Freetown, the capital.

The improvement coincides with the government seeking to reduce domestic borrowing by half this year after debt rose to 1.14 trillion leones ($264 million) in 2012, the ministry said in a report published April 22. Lower bill yields should prompt banks to cut their own rates and boost lending to companies to support economic growth, Finance Minister Kaifala Marah said in an e-mail April 23. The International Monetary Fund forecasts inflation will slow to 9 percent this year from 12 percent.

“The government should not crowd out the private sector by being the biggest single borrower in the domestic bond market, driving up interest rates,” Marah said in the e-mail. “We want the private sector to continue to participate in the economy, and we would not achieve that if our appetite for borrowing continues unabated.”

Lending Rate

The amount of bills sold by the Bank of Sierra Leone in the first quarter dropped 18 percent from the previous three months to 489 billion leones, according to data compiled by Bloomberg. Debt rose as government spending climbed on borrowing to spend on infrastructure projects including roads and power output.

Debt to gross domestic product will slow to 40 percent this year from 44 percent in 2012 after climbing as high as 162 percent in 2003, according to IMF estimates and data.

The government wants to cut debt by at least 50 percent in 2013, Joseph Thullah, an economist in the ministry’s public debt management department, said in an interview May 7. Any financing shortfalls will be made up by seeking donor funds, he said.

The Bank of Sierra Leone lowered its key lending rate by 300 basis points to 17 percent on April 11, saying concern about inflation pressure from prices for imported food and fuel “may be cushioned by the relative stability in the exchange rate.”

Civil War

The leone is the fifth-best performer among African currencies tracked by Bloomberg this year, rising 0.3 percent against the dollar. It traded at 4,322.58 by 4:45 p.m. in Freetown yesterday.

Sierra Leone is spending on infrastructure and luring investment from mining companies after the 2002 end of a civil war that left 50,000 people dead and displaced 2 million. The Revolutionary United Front guerrillas gained notoriety for amputating the limbs of their victims and using children as soldiers.

African Minerals Inc. and London Mining Plc, both based in London, began iron-ore exports in late 2011, Koidu Holdings SA plans to boost diamond exports and Sierra Rutile Inc. (SRX) is increasing output of the material used in paint and ceramics. Oil companies including Moscow-based OAO Lukoil have stakes in offshore blocks

The deficit in Sierra Leone’s current account, the broadest measure of trade in goods and services, may narrow to 9.7 percent of gross domestic product this year from 20.8 percent in 2012, according to the IMF.

Yields Retreat

With Sierra Leone’s improving current account and “inflation having stabilized in low double digits, the incentive to keep T-bill yields at substantially elevated levels has dissipated,” Samir Gadio, an emerging-markets strategist at Standard Bank Group Ltd.’s London unit, said in an e-mailed response to questions on May 15.

Yields on 182-day notes fell to 9.74 percent on May 10, down almost 16 percentage points since the last sale of 2012. Debt with 364-day maturities have retreated 14 percent to 11.4 percent last week. Sierra Leone sells bills on Thursdays and offers 1-year debt at irregular intervals.

To contact the reporter on this story: Silas Gbandia in Freetown via Accra at ebowers1@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net

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