World Bank Says Africa Eurobond May Be Costly to Refinance

African nations tapping demand from bond investors lured by high yields may find refinancing of their Eurobonds costly, the World Bank’s chief economist for the continent said.

“They seem easy to get in the first place. They can be quite expensive later on,” when governments may need to refinance the debt, Francisco Ferreira said in an interview on Sept. 19 in Lusaka, Zambia’s capital.

Countries in Africa sold a record $6.25 billion of dollar-denominated debt in 2013. This may be followed by $6 billion worth of issuance this year, Fitch Ratings said in January. Low interest rates in the U.S. and Europe have made African debt attractive because of its relatively higher yields. If countries want to roll over the loans when they mature, rates may rise sharply, Ferreira said.

“If when the negotiations come up and the country is in crisis the interest rate shoots up,” he said. “They are relatively high risk unless you are able to guarantee that you don’t need that financing when they come to maturity.”

The coupon rate on Zambia’s Eurobonds rose by more than 300 basis points in its second issuance of $1 billion this year to 8.5 percent from a debut sale in 2012. Ghana sold $1 billion of amortizing Eurobonds due January 2026 this month at a coupon of 8.25 percent, compared with 7.875 percent for August 2023 notes sold last year. Yields on African dollar bonds fell 70 basis points this year to 5.1 percent on Sept. 19, according to JPMorgan Chase & Co. indexes.

Fitch on Sept. 19 revised its outlook on Zambia’s debt to positive and reaffirmed its ‘B’ rating, citing more positive public finances.

Ghana started talks with the International Monetary Fund last week, while Zambia plans negotiations as the nations struggle with rising budget deficits resulting from ballooning public wage bills. Zambia will probably start talks after the budget for 2015 is delivered next month, Finance Minister Alexander Chikwanda said.

A fiscal injection from the IMF will be useful to bolster the economy, Ghanaian President John Dramani Mahama said in an interview in New York yesterday.

The talks will probably focus on gradually shrinking each country’s deficit, Ferreira said. This will include the need to “pace ourselves” in infrastructure spending and may require higher taxes, he said.

“You don’t lower public sector wages,” said Ferreira. “You then have to manage the growth process going forward and you may have to raise more revenue as part of the solution.”

Ivory Coast and Kenya have also sold Eurobonds.

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