Biggest Bond Binge in History Passes Africa By as Yields Riseby
Africa’s decade-long rush into Eurobond market has halted
Yields on the continent far above emerging-market average
Africa is missing out on the biggest emerging-market bond party in history.
As countries from Saudi Arabia to Papua New Guinea prepare to hit the market with tens of billions of dollars in Eurobond sales before the Federal Reserve increases interest rates, issuance from sub-Saharan Africa has all but dried up, with Ghana canceling a deal, Kenya, Nigeria and Ivory Coast delaying theirs and little in the pipeline. Only two nations -- South Africa and Mozambique -- have sold dollar securities this year, the latter in a restructuring of existing debt. African sales of $2 billion in 2016 are the lowest since 2008, when the financial crisis froze the market.
Boosted by surging economies, African issuers rushed into global bond markets in the past decade, most of them for the first time. Their economies have since been battered by falls in prices of commodities from oil to copper and iron ore, forcing some to turn to the International Monetary Fund for bailouts. While Africa’s borrowing rates have dropped since February as investors hunt for higher-yielding assets, they are still more than 200 basis points above the emerging-market average. That’s made governments nervous about taking on debt in foreign currencies, according to FirstRand Ltd.’s Rand Merchant Bank unit.
“We long argued that the Eurobond market was mis-pricing the credit risks inherent in each country,” Nema Ramkhelawan-Bhana, an analyst at RMB in Johannesburg, who doubts there will be many more deals this year, said by phone on Aug. 29. “We’ve now seen an adjustment. When we see sovereigns go out on roadshows to gauge investor sentiment, we haven’t necessarily seen follow-through with deals because it’s a bit expensive for them.”
The dearth of activity contrasts with a frenzy elsewhere. Deals of $9 billion from Qatar and $16.5 billion from Argentina helped propel Eurobond issuance among emerging-market sovereigns to a record $90 billion in the first half of the year. JPMorgan Chase & Co. projects an all-time high of $125.5 billion of transactions in 2016.
African governments sold a record of $8 billion of international bonds in 2014. Last year, issuers from Angola to Zambia tapped the market, bringing the total to $6.75 billion.
Ghana, West Africa’s biggest economy after Nigeria, scrapped a sale of as much as $1 billion this month. It balked at the rates demanded by investors to compensate for a weakening currency, rising debt burden and a large fiscal deficit caused by weaker prices for gold and oil. While yields on the country’s $1 billion notes due in August 2023 have dropped from a record 16 percent on Jan. 20, at 9.38 percent they’re more than 500 basis points above the emerging market average of 4.25 percent, according to Bloomberg indexes.
Ivory Coast has also ruled out a Eurobond this year as the depreciation of the euro, to which the Francophone country pegs its currency, makes dollar debt less attractive, Finance Minister Adama Kone said in an interview last week.
Nigeria’s plans to issue at least $1 billion in 2016 have been held up by investor concerns about an economy that the IMF forecasts may contract this year for the first time since 1991 because of a rout in oil prices and a slump in production. While Nigeria has asked banks to place bids by Sept. 19 if they want to manage the Eurobond sale, it may hold off and instead try to entice foreign investors to buy local bonds, according to RMB’s Ramkhelawan-Bhana.
Other countries are shut out of the market altogether after their yields soared. At 17.12 percent, those on Mozambique’s $727 million of securities due in 2023 are the highest in the world after Venezuela’s. Investors have fled after the southern African nation, already struggling with plunging exports, revealed $1.4 billion of state-guaranteed loans that it had previously kept secret.
Falling prices for raw materials have placed “significant stress” on several African economies, said Marco Santamaria, a money manager in New York at AllianceBernstein LP, which oversees almost $500 billion of assets. “Clearly, that’s made investors more cautious, which is reflected in the high yields for some of the countries. For governments thinking of raising funds, the Eurobond market probably isn’t the most obvious place.”
For those that need the money, time may be running out. The IMF said Kenya, for one, needs to act swiftly to avoid increased borrowing costs that are likely to follow if capital is drawn out of emerging markets by a rise in U.S. interest rates.
“There should be more issuance from September,” said Ray Zucaro, chief investment officer of hedge fund RVX Asset Management in Miami, whose only African assets are Nigerian Eurobonds. “But you’ve had volatile energy prices, which impacts the likes of Nigeria and Ghana. We’re not bullish on metals prices, which puts Zambia in a tricky space. All these things stirring together have damped investor appetite for sub-Saharan Africa.”