Bond Market Turns Against African Borrowers as Debt Costs Soar

  • Issuance falling from record high in 2014 as currencies drop
  • African Eurobonds losing money deter investors like Acadian

When Zambia first sold bonds in international markets in 2012, the country got so much demand it could have issued 16 times the $750 million it raised. Fast forward three years to an offering in July and the southern African nation only got twice as many bids for the $1.25 billion on sale.

The drop in appetite illustrates the problems besetting much of Africa, where falling prices for commodities from oil to copper are sapping growth and revenues at a time when governments want to boost investment in everything from energy infrastructure to schools and hospitals. Ghana this month became only the fourth country in the past decade to issue a Eurobond at yields above 10 percent, while Zambia earlier joined six other nations that had sold debt at rates higher than 9 percent since 2010.

“These are really high yields,” Marco Santamaria, a money manager at AllianceBernstein, which has $27 billion invested in developing nations, said by phone from New York. “It’s undoubtedly become a lot tougher for them. The market has become more nervous about the prospects for many of these African countries.”

Two years ago, with the outlook for emerging markets still rosy, money was cheaper. In July 2013, Ghana sold 10-year securities at 8 percent, while Zambia paid 5.63 percent for its debut international bond in August 2012, compared with 9.38 percent for the latest deal.

Issuance from the region has fallen from 2014, when it reached a record $8.5 billion, as investor confidence wanes amid weakening economies and depreciating currencies, which make foreign debt more expensive to pay off. On Thursday, Namibia offered a yield almost 80 basis points above that on its existing securities as it sold the first investment-grade transaction from sub-Saharan Africa this year, following deals totaling $3.75 billion from junk-rated Gabon, Ghana, Ivory Coast and Zambia. Angola, the continent’s second-biggest oil producer after Nigeria, is set to start meetings with U.S. bond investors on Oct. 26.

Ghana, West Africa’s second-biggest economy, came unstuck as it ramped up borrowing to cover pay increases for civil servants and falling revenue from exports of gold, oil and cocoa. Its ratio of foreign debt to gross domestic product has more than doubled to 38 percent since 2006, the year before it sold the first of its $3.75 billion of Eurobonds. In February, it turned to the International Monetary Fund for a loan of about $900 million, while this month’s bond was issued with the help of a 40 percent guarantee from the World Bank.

Copper-rich Zambia, experiencing its worst economic slump in 17 years and whose currency is the world’s worst-performer against the dollar in 2015, has also gorged on debt. The government’s foreign borrowings to GDP will surge to 27 percent next year from 9 percent in 2011, according to Standard Chartered Plc. The state allocated 14 percent of its 2016 budget for interest payments, while 8.3 percent will go to health. By comparison, Germany sets aside about 3.5 percent of its budget for debt payments.

Ghana and Zambia face “a mountain to climb to stabilize public debt,” Bloomberg Intelligence analyst Mark Bohlund said in an Oct. 16 note.

Most African Currencies Weaken Against Dollar in 2015
Most African Currencies Weaken Against Dollar in 2015

They’re not the only governments that will have to get used to higher borrowing costs. Average sub-Saharan African dollar yields soared by almost 150 basis to 7.21 percent between the end of April and Oct. 22, while rates on emerging market debt barely budged, according to data compiled by Bloomberg.

Yields on Nigeria’s $500 million bond due in July 2023 were 7.34 percent on Friday, 1.9 percentage points above levels in May. Kenya, East Africa’s largest economy, has seen its dollar yields climb to over 8 percent from about 6 percent in the past six months.

“A number of African countries could find it harder to issue in the coming years,” Samir Gadio, head of African strategy at Standard Chartered, said by phone from London. “Some of them will be able to issue at an expensive but still bearable level. For others, it’s becoming much less sustainable.”

Boston based-Acadian Asset Management has sold all its African debt apart from Ugandan shilling bonds.

One Mistake

“That’s specifically because it’s never issued in foreign currency,” Bryan Carter, a money manager at Acadian, said by phone on Oct. 15. “That’s the one mistake a lot of these countries made: taking on so much debt in dollars.”

Landesbank Berlin Investment GmbH, which has $1 billion of emerging market assets, about two months ago switched to shorter-dated African Eurobonds in anticipation of the first increase in U.S. interest rates in almost a decade, which may draw capital out of emerging markets and cause bond prices to fall.

It bought Nigeria’s dollar securities due in July 2018 below the par price and intends to hold them until maturity, according to Lutz Roehmeyer, a money manager.

“Long-term debt is not our favorite,” Roehmeyer said by phone from Berlin. “Things are really painful for African borrowers right now. I would advise many of them not to issue because the yields are too high.”

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