Citigroup Sees Window for African Borrowers Before Fed Rate RisePaul Wallace and Lyubov Pronina
A window has opened for African countries from Senegal to South Africa to lock in low borrowing costs by selling Eurobonds before the U.S. raises interest rates, according to Standard Bank Group Ltd. and Citigroup Inc.
Sub-Saharan African nations sold a record $9.2 billion of Eurobonds last year, up from $6.7 billion in 2013, as issuers including Ivory Coast and Kenya tapped the market before funding conditions worsened in the second half as crude oil prices plunged, weighing on economies such as Nigeria and Ghana. Since December, yields have dropped as oil prices stabilized and central banks in Europe and Japan extended stimulus, providing an opportunity to resume borrowing before the Federal Reserve tightens policy.
The average premium investors demand to hold African dollar-denominated bonds rather than Treasuries has dropped 63 basis points to 365 since climbing to a three-year high in December. Yields on Senegal’s $500 million of notes due July 2024 fell 1.81 percentage points in the period.
“The market’s incredible for African issuers,” Nicholas Samara, Citigroup’s vice president for debt capital markets in Central and Eastern Europe, Middle East and Africa, said by phone from London on April 13. “It can’t get any better. Many policy makers are looking to issue in the capital markets before the landscape changes.”
The Fed will probably increase its policy rate in the third quarter for the first time since 2006, according to a Bloomberg survey of economists. The 74 economists predict rates climbing to 0.75 percent from 0.25 percent by the end of 2015, pushing up dollar-borrowing costs for African nations.
Demand for African debt has risen as yields in the developed world have fallen, a trend to which the European Central Bank gave impetus by introducing a 1.1 trillion-euro ($1.2 trillion) bond-buying plan last month to boost the continent’s struggling economies. While few sub-Saharan sovereign Eurobonds yield less than 6 percent in the secondary market, Switzerland became the first country to sell a 10-year bond with a negative yield on April 8.
The ECB’s quantitative easing “helps” African borrowers by ensuring developed-market investors have more money to buy high-yielding assets, Graham Stock, head of emerging-market research at Bluebay Asset Management, which oversees $66 billion of fixed-income investments, said by phone from London on April 15. “It leaves global monetary conditions more accommodative than they otherwise would be.”
Investors have also been attracted by Africa’s high growth rates, fueled by a young population and investment in infrastructure, according to White & Case LLP, a law firm that advises companies and governments on bond sales. Sub-Saharan Africa’s economy will expand 4.5 percent in 2015, a faster pace than any other region aside from developing Asia, the International Monetary Fund said on April 14.
Out of 22 sub-Saharan African countries tracked by Bloomberg, 17 had populations where more than 40 percent of people are under 15. In Switzerland 14.7 percent of the population is below that age.
“The reason everyone is so focused on Africa is that it is a land of opportunity,” Stuart Matty, global head of capital markets at White & Case in London, said by e-mail on April 14. “When you have a significantly youthful population, you tend to see growth.”
Ghana, Tanzania and Senegal are among African nations planning Eurobond sales this year, following a sale of $1 billion of 13-year securities by Ivory Coast in February.
“African bond markets are growing at a very strong rate albeit from a low base,” Chris Tuffey, Credit Suisse Group AG’s head of debt syndicate in eastern Europe, Middle East and Africa, said by e-mail on April 14. “Looking at Sub-Saharan Africa, you have increasing prosperity which fuels demand for infrastructure, consumables and further economic growth.”
South Africa, which aims to raise $4 billion over the next three years according to the National Treasury’s February budget, may also tap the market in coming months, as could Ethiopia, Kenya and Nigeria, according to Megan McDonald, head of global debt primary markets at Standard Bank.
“We are going to see yields pick up as soon as U.S. rates start to rise,” Johannesburg-based McDonald said by phone on April 14. “Given the economic challenges some sovereigns are facing, I’d suggest they come to market sooner rather than later.”