Three oil-producing African nations are preparing to sell as much as $3.75 billion in international bonds in 2013, the most from the continent ever, after yields sank below Italy and Spain and investors set aside concerns sparked by Ivory Coast’s default almost two years ago.
Nigeria plans to borrow $1 billion on overseas markets, twice as much as it sold in 2011, while Angola is seeking $2 billion of debt. Ghana, which issued the first Eurobonds in sub-Saharan Africa outside of South Africa in 2007, may sell a further $750 million, Deputy Finance Minister Seth Terkper said by phone from Accra Dec. 13. Sales the past 14 months by Namibia and Zambia drew five to 20 times more demand than sought.
As the World Bank estimates sub-Saharan Africa needs $93 billion a year to overcome poor road networks and shortages of power and water, governments are taking advantage of historic-low yields across emerging markets. Yields on Nigeria’s dollar bonds due January 2021 have dropped 201 basis points this year to 4.1 percent, while similar-maturity debt sold by Spain yields 5.18 percent and that for Italy 4.38 percent. Ivory Coast, which defaulted on $2.3 billion of bonds in January 2011, rewarded investors with the world’s best returns.
“Given their inherent financing needs and the lack of capital, it would be beneficial for African issuers to access cheap financing while it is available,” Kojo Amoo-Gottfried, a London-based analyst at FM Capital Partners Ltd., which manages about $1 billion, said by phone Dec. 11. “Conducive market conditions will not persist indefinitely.”
Average emerging-market dollar-denominated bond yields have fallen 85 basis points, or 0.85 percentage point, this year to a record 5.57 percent, according to JPMorgan Chase & Co.’s EMBI Global Index. The International Monetary Fund estimates developing nations will post growth rates next year almost four times faster than the developed world. Even with the declines, average yields compare with 1.8 percent on 10-year U.S. Treasuries, luring investors seeking higher returns.
Sub-Saharan Africa’s gross domestic product will expand 5.7 percent in 2013, the fastest pace after developing nations in Asia, from 5 percent this year, the IMF said Oct. 9, boosted by higher commodity prices.
Investors are looking to tap into “a good growth story,” Aurelien Mali, a senior analyst at Moody’s Investors Service, said in a Nov. 7 phone interview from London.
Moody’s Investors Service assigned Ghana a B1 rating today, four levels below investment grade and the same level as Zambia and Kenya. The rating company cited the country’s “robust growth prospects” in its report.
While yields on Ghana’s dollar notes due October 2017 have dropped 164 basis points this year to 4.9 percent, those on five-year cedi-denominated debt stood at 21.25 percent according to Standard Chartered Plc prices. The higher domestic yields, reflect “underdevelopment of the domestic capital market and also the fact there is macroeconomic instability, inflation volatility and public finance with fiscal deficit volatility,” Mali said. “There is not a lot of credit stability for those markets.”
The drop in dollar funding costs reflects a “bubble” for emerging markets and doesn’t compensate for the risks investors are taking on, Charles Robertson, global chief economist at Renaissance Capital, said in a Nov. 13 interview in London.
Nigeria’s inflation rate has stayed above the central bank’s 10 percent target this year, with price growth accelerating 12.3 percent in November. Sub-Saharan Africa’s second-biggest economy also relies on crude exports for about 95 percent of foreign-currency earnings and 80 percent of government revenue.
Ghana’s cedi has dropped 14 percent this year against the dollar, the worst performing currency in Africa after Sudan’s pound and Malawi’s kwacha. Kenya’s shilling plunged as much as 32 percent last year amid a fourfold surge in inflation.
“We are in a hard currency bond bubble globally,” Robertson said. “Local debt is the better prospect” because yields are higher than foreign securities to compensate for risk, he said.
Nigerian President Goodluck Jonathan said in his budget speech in October that the West African nation will sell its second Eurobond in 2013. Yields on Angola’s next international bonds may be lower than the 7 percent on seven-year debt sold in August because market conditions have improved, VTB Bank OJSC Chairman Andrey Kostin, which helped Angola sell its notes, said Oct. 31 after meeting the country’s President Jose Eduardo dos Santos and Vice President Manuel Vincente.
Kenya, Rwanda, Tanzania, Uganda and Mozambique may also issue their first foreign-currency bonds in the next few years, Moody’s said in October. Of the 54 countries in Africa, 13 have sold foreign-currency denominated debt on international markets, according to Moody’s. Dollar funding shields investors’ from currency swings and inflation, while giving issuers access to financing at lower rates than at home.
Investors are favoring African dollar bonds because they are scarce and holding them means they can diversify their portfolios, said Moody’s Mali. About 10 percent of the region’s external debt stock is international issuance, he said.
As Ivory Coast resumed interest payments in June and got an agreement from bondholders to service arrears by 2014, the government’s notes due December 2032 have returned 87 percent this year to 93.09 cents on the dollar, with yields dropping 765 basis points to 7.23 percent, according to data compiled by Bloomberg.
“If you’re looking for yield its really one of the last frontiers to find it,” Daniel Broby, deputy chief executive officer of Silk Invest Ltd., which holds Nigerian, Zambian and Senegalese Eurobonds, said in a Dec. 12 phone interview from London. “The risk is they get greedy. I just hope that in this rush for this window they act prudently.”