Nigeria Vies for Investors as Yields Fall: South African Credit
At least five African nations including Nigeria are planning international bond sales this year, providing investors targeting the world’s poorest continent with alternatives to South African debt.
The extra yield investors receive for holding Nigerian dollar bonds maturing in January 2021 rather than similar- maturity South African dollar debt has narrowed 74 basis points this year to 34. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have lowered South Africa’s debt since September, while S&P raised Nigeria’s rating in November.
As downgrades, labor unrest, slowing growth and a widening budget deficit turn investors against South Africa, prospects for other sub-Saharan African nations are improving. The International Monetary Fund forecasts the region will expand 5.8 percent this year, from 4.8 percent in 2012. Bond sales may help ease liquidity constraints that have deterred institutions from participating in the continent’s debt markets, with returns on Nigerian securities more than twice that of South Africa.
“African countries other than South Africa are on a lot more people’s radar,” Richard Odumodu, head of fixed-income investments at London-based Silk Invest Ltd., which manages about $130 million, said in a Jan. 28 phone interview. “One of the attractions for us is that Africa is a universe that will continue expanding.”
Nigeria, Africa’s largest oil producer and biggest economy after South Africa, plans to borrow $1 billion on overseas markets, twice as much as in 2011, President Goodluck Jonathan said in October, while Angola is seeking $2 billion of debt.
Ghana, which issued Africa’s first Eurobonds outside South Africa in 2007, may sell a further $750 million, Deputy Finance Minister Seth Terkper said in December. Rwanda, Uganda and Kenya have also signaled they may sell international securities. Sales the past 15 months by Namibia and Zambia drew five to 20 times more demand than sought.
South African bonds have slumped following the downgrades, a slide in the rand and strikes at gold and platinum mines, which the central bank forecasts will constrain the nation’s expansion to 2.6 percent this year and cut 2012 growth to an estimated 2.5 percent, the slowest pace since a 2009 recession. The nation’s budget deficit is set to widen to 4.8 percent of gross domestic product in the year through March, from 4.5 percent, Finance Minister Pravin Gordhan said in October.
Nigeria’s growth rate may accelerate to 7 percent this year, from an estimated 6.6 percent in 2012, while the nation’s budget deficit is set to narrow to 2.2 percent of GDP, from 2.9 percent, according to Barclays Plc’s investment banking unit.
The premium of South Africa’s dollar-denominated securities over U.S. Treasuries has widened 26 basis points this year to 189, compared with a 2 basis-point increase in the average spread for emerging-market debt, according to JPMorgan Chase & Co. indexes. The premium for Nigerian debt has narrowed 24 basis points to 237.
Yields on South Africa’s benchmark 6.75 percent rand bonds due March 2021 have climbed 11 basis point this year to 6.50 percent. The rand has weakened 4.4 percent this year, the worst performer among 16 major currencies monitored by Bloomberg after the Japanese yen. The rand gained 0.5 percent to 8.8675 per dollar as of 4:49 p.m. in Johannesburg.
Yields on similar-maturity Nigerian naira bonds have fallen 79 basis points to 11.22 percent while the naira strengthened 1.8 percent. Borrowing costs may drop further as the nation’s central bank cuts interest rates, according to Michael Grobler, a fixed-income analyst at Afrifocus Securities in Cape Town.
“Despite the strong rally we like the Nigeria story,” Grobler said in a Jan. 28 e-mailed note to clients, in which he recommended buying the nation’s 20-year debt. Given the decline in the country’s dollar-bond yields, local-currency debt offers more value, he said.
S&P rates South Africa’s debt BBB, the second-lowest investment grade and Nigeria four steps lower at BB-. Nigeria has been battling an insurgency by the Islamist militant group Boko Haram that’s killed hundreds of people in bomb attacks since 2009. The group declared a cease-fire on Jan. 28.
The ratings company assesses the credit worthiness of about 16 other sub-Saharan African countries, which have an average rating of B, five levels below investment grade yet still considered able to meet their financial obligations.
“The big emerging-market funds are happy to deal” with lower credit ratings in exchange for higher returns, Steven Loubser, a Cape Town-based fund manager at Investec Asset Management, which oversees more than $95 billion, said by phone Jan. 30. “There is a lot more capital looking for a home.”
Moody’s assigned Ghana a B1 rating on Dec. 20, four levels below investment grade and the same level as Zambia and Kenya.
Just 13 of the 54 nations in Africa 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.
“We expect the number of countries that will seek international sovereign credit ratings will continue to grow,” and the African bond market should continue to expand, Konrad Reuss, head of S&P’s sub-Saharan African unit, said in a Jan. 24 interview in Cape Town. “One country that has being saying it is interested in a rating for quite some time is Tanzania.”
Access to international capital markets should help countries lower their borrowing costs and manage their budgets more effectively, according to Investec’s Loubser.
“It’s probably better for them than for investors at this point,” he said. “We are very positive on African credit.”