Keen appetite

SSA Special Report 2021
18 min read
Jason Mitchell

Strong foreign investor appetite for Ghana's recent Eurobond offering bodes well for other African countries wishing to tap the international capital markets for money needed to roll over debt and to finance strained Covid-19-hit budgets

Ghana's US$3bn bond market entrance at the end of March was twice subscribed and made it the first sub-Saharan African sovereign to issue a Eurobond in US dollars since the onset of the coronavirus pandemic.

“This historic bond issuance is a strong signal that investors have confidence in our plan for debt sustainability, economic recovery and growth, and that Ghana remains a pillar of stability," said the country's finance minister, Ken Ofori-Atta, in a statement. "Part of the proceeds shall be used for domestic liability management."

The transaction was made up of four tranches: a US$525m four-year zero-coupon; a US$1bn 7.75% seven-year weighted average life; a US$1bn 8.625% 12-year WAL; and a US$500m 8.875% 20-year WAL.

The nation is the first emerging market sovereign to add a zero-coupon bullet tranche to its bond financing portfolio, and by using US$400m of it to refinance domestic debt with an average interest rate of 19%, Ghana will realise savings of some US$200m over the four years, according to the finance ministry.

The country's appearance was a key test of appetite for African issuers, after a raft of sub-Saharan nations sought debt relief last year, a move that shook global investor confidence in the region. Successful international issuance should sidestep the need for debt relief and the questions that would raise over market access, analysts say.

Sub-Saharan sovereigns regained access to the international bond market at the end of last year, after investors had shunned emerging markets when the pandemic first hit. Ivory Coast’s issuance of a €1bn January 2032 Eurobond with a 5% yield on November 25 was the first in the region since the intensification of the pandemic. It was priced at a record low yield and was still five times subscribed, underlining the high investor appetite for African debt.

Benin followed, issuing €1bn on January 12 this year. For this operation, the Beninese government issued a €700m 4.875% 11-year at a 5.125% yield, with the remaining €300m coming in the form of a 6.875% 31-year priced to yield 7.25%. The following month, Ivory Coast raised €850m in a reopened Eurobond sale, consisting of €600m January 2032s at a yield of 4.30% and a €250m tap of its March 2048s at 5.75%.

Among North African countries, in December, Morocco issued €1bn in the international market in two tranches of €500m that was two and a half times subscribed. The first tranche, with a maturity of 5.5 years, was sold at a price of 99.374 for a yield of 1.495%, while the second, with a maturity of 10 years, was sold at 98.434 for a yield of 2.176%.

In February, Egypt also issued US dollar-denominated Eurobonds, selling US$3.75bn across three tranches to finance part of its budget deficit after receiving requests for a whopping US$15bn. It sold a US$750m five-year at 3.875%, a US$1.5bn 10-year at 5.875% and a US$1.5bn 40-year at 7.5%.

Looking abroad

Kenya also plans to raise a greater share of its debt from foreign rather than domestic investors in the future. It wants to raise KSh123.8bn (US$1.13bn) from sovereign bonds sold to overseas accounts in the next four months and an additional KSh124.3bn during the fiscal year starting in July, according to the National Treasury.

It is targeting a foreign-to-domestic net borrowing ratio of 57:43 covering the period 2021 to 2024, compared with 21:79 in the past fiscal year. The government previously said it wanted to limit its external debt exposure to mainly concessional loans. Commercial foreign loans will be limited to financing projects with high returns.

“It is a good time to issue a Eurobond, as there is certainly appetite for higher-yielding debt,” said Yvonne Mhango, head of sub-Saharan economic research at Renaissance Capital. “Given the stretched fiscal finances, concessional loans would be a more affordable and sustainable source of financing. Either way, the proceeds of the foreign loan will help the authorities shore up foreign exchange reserves."

Neville Mandimika, Africa economist and fixed income analyst at Rand Merchant Bank, said: "Last year, we saw very little sovereign bond issuance from sub-Saharan Africa. In the wake of the pandemic, yields spiked a lot, to more than 10%, so that put off a lot of issuers.

"Furthermore, many African nations received emergency help from multilateral finance institutions after the pandemic and did not need to issue debt. This year, we could see slightly more issuance as yields have fallen from a year ago. However, the rise in US Treasury yields – and African borrowing costs by extension – could limit the number and size of the issuances."

Accommodative monetary policy in advanced economies helped to ease the cost of borrowing on international capital markets, with bond spreads narrowing in many countries in the region in the fourth quarter last year, noted the World Bank in its latest biannual report, Africa's Pulse.

"The global search for yield – triggered by the massive monetary easing in advanced economies – has helped bring down the cost of debt," it said. "Continuing support from international financial institutions and improved access to international capital markets helped alleviate pressures on domestic currencies in the region – with the exception of Zambia, where the exchange rate has continued to depreciate against the US dollar on concern about the country’s debt servicing cost."

Experts say Eurobond issuance in the region may remain lower than in pre-pandemic years, in part due to greater official creditor financing.

The big question mark hanging over many sub-Saharan nations is how they can service their public debt in the wake of the pandemic and the resulting economic meltdown. Many African countries have built up a high level of public debt since they enjoyed US$100bn of debt relief under the Heavily Indebted Poor Countries Initiative (HIPC) and the related Multilateral Debt Relief Initiative (MDRI) at the turn of the millennium.

Hard figures for African debt – especially that owed to China – are difficult to obtain, but sub-Saharan Africa had total external debt of US$583bn at the end of 2018, according to the World Bank. China is believed to account for the biggest slice of Africa’s external debt at US$152bn, according to the China Africa Research Initiative team at Johns Hopkins University.

One of the biggest transformations has been the nature of the debt that African nations have taken on. Until 2010, it mostly took the form of bilateral or multilateral credit but, since that time, many sovereigns have assumed commercial debt with a wide universe of private sector creditors, including commercial banks, asset owners and managers, commodity brokers, export credit agencies, sovereign wealth funds, hedge funds and non-financial companies. In April 2020, for example, 21 African countries had outstanding foreign currency debt obligations in the form of Eurobonds of roughly US$115bn, according to Moody’s.

A big challenge for African sovereigns has been the high cost of borrowing – with interest rates between 5% and 16% on 10-year government bonds – during the past few years, compared to near zero to negative rates in Europe and the US. One of the main motives for new issuance now is pricing in the lower yields currently on offer.

In sub-Saharan Africa, debt interest payments gobble up close to 50% of government revenues in the case of Ghana and around 30% in the cases of Nigeria and Angola, S&P Global calculates. It is around 30% in Kenya, as well, according to that country's official estimates. Zambia, Mozambique, Republic of Congo and Angola have all seen their debt burdens soar above 100% of GDP.

Covid-19 saw average government debt in EMEA emerging markets jump to 63.5% of GDP compared to 51.8% in 2019. Six African countries were deemed in debt distress by the IMF in February this year and the average debt burden for the region is forecast at around 64% of GDP in the near to medium term by Moody’s.

Economists say that one of the more pressing vulnerabilities for sub-Saharan sovereigns is the cost of servicing external debt, mostly in US dollars, compared with earnings from exports.

Default fears

In October, Zambia became the first African country to default on its debts since the pandemic started, leading to fears of what analysts call a 'debt tsunami', which would engulf other highly indebted nations. It was unable to make its coupon payment on its US$1bn Eurobond maturing in 2024 despite being granted a 30-day grace period.

The country’s proposal to defer bond repayments to March 2021 was rejected by investors. Its bond yields leapt in response to the default, with its 10-year bond yield rising to 38%, the level it attained during the Covid-19 first wave peak in the first half of 2020. However, the expected wave of mass defaults did not happen.

Sovereign bonds for Angola, Republic of Congo, Democratic Republic of Congo and Mali are now classified by credit ratings agencies as ‘substantially risky’ and ‘extremely speculative’, according to the African Union. These rating classifications indicate that these countries’ speculative-grade or ‘junk’ bonds carry a higher risk of default, and are currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments.

"We have not seen any contagion effect from Zambia's default as global liquidity remains so abundant," said Moritz Kraemer, chief economist at CountryRisk, the Zurich-based country risk consultancy. "Very little African sovereign debt is becoming due this year, so not a lot of refinancing is needed this year. However, there is a lot of debt maturing around 2023 and 2024, and it would be wise for sovereigns to attempt to refinance now while yields are comparatively low and the door is open."

The opportunity for African sovereigns to borrow cheaply is great but investors need to be pay greater attention to how the money is spent. Furthermore, the recent rise in US Treasury yields means it is not quite so cheap for these nations to borrow as a few months ago.

"Sovereign bonds issued by African countries continue to be oversubscribed despite the impact of the Covid-19 pandemic, which is adequate proof that Africa’s debt instruments remain attractive," said the African Union in a recent report. "It is an opportunity for countries to structure favourable terms on their sovereign bonds, medium to long-term tenor and low yields, as developed markets such as Japan, Germany and China are issuing negative-yielding government bonds."

The second half of last year saw a total of nine African countries downgraded, compared to 12 in the first half of the year, according to the African Union. A total of nine countries also had their rating outlook negatively changed either from positive to stable or from stable to negative.

The African Union is recommending that countries should stabilise their macroeconomic fundamentals to enable them to issue debt in their local currency on domestic debt capital markets. This would promote the development of domestic debt markets, support short-term government liquidity demands and raise fiscal revenue from secondary market transaction taxes.

Ethiopia looks set to become a test case for how African countries deal with their ballooning debt as the Covid-19 crisis bites. At the end of January this year, it signalled it could be the first country with an international government bond to use a new debt relief framework from the G20 group of major economies – the so-called the Common Framework under the Debt Servicing Suspension Initiative (DSSI) – put together with the support of the International Monetary Fund. It grants developing countries debt-service suspension to help weather the coronavirus pandemic; however, bondholders are concerned about being forced to provide similar relief.

It was Ethiopia's decision to use the Common Framework that prompted S&P to downgrade its sovereign rating from B to B– on February 12. It has also placed the country’s new rating under review and warns that it will be changed to SD (selective default) if its commercial debt is renegotiated or if its appears unwilling or unable to meet its next private sector creditor maturities. Ratings agencies have warned that even missed small coupon payments would be regarded as a default. Defaults are highly problematic because they can cause years of legal wrangling that freeze governments out of capital markets.

The truth is that African sovereigns seeking to renegotiate their debt are in a bind: the G20 insists that governments must apply the same treatment to the private sector but ratings agencies say that they could declare governments to be in default if private sector debts are involved.

Playing the long game

Many economists expect countries will just keep paying their debt, as they judge that keeping their hard-earned access to borrowing markets will be more beneficial in the long term than instant debt relief.

"The upshot is that, across much of sub-Saharan Africa, we suspect governments will probably end up living with higher debt burdens," said Jason Tuvey, senior emerging markets economist at Capital Economics, a London-based economics consultancy.

"As the height of the crisis has passed, some of the potential benefits from defaulting, notably freeing up resources to spend in other areas, may no longer outweigh the costs in terms of a loss of investor confidence, ratings downgrades and being locked out of international capital markets. That said, living with higher debt will come at the expense of tighter fiscal policy and weak economic growth."

The economic impact of Covid-19 has been severe in the sub-Saharan region but countries are weathering the storm, according to the World Bank. The region's economy contracted by an estimated 2% in 2020, at the lower end of the World Bank's forecast range made in April 2020. Economic growth is forecast to rise to between 2.3% and 3.4% in 2021, depending on the policy measures adopted by countries and the international community.

Even if the external economic picture looks less gloomy, Covid-19 has cast the liquidity woes and the debt problems of many countries into striking relief. An African Union study on the economic impact in April 2020 showed that African governments could lose up to US$500bn in tax revenues, forcing countries to borrow heavily for emergency budgetary spending.

During the past year, many African governments have turned to the G20’s DSSI initiative on the advice of the World Bank and the IMF. A total of 31 have signed up to the DSSI since its launch in May 2020, but the programme will only account for 15% of total annual debt service payments owed by African countries to their external creditors this year, Afreximbank warns.

“Nobody should underestimate the amount of effort it took the IMF and others to mobilise the G20’s DSSI original package [in 2020] as well as the extension obtained in December for a further six months in 2021," said Carlos Lopes, a development economist. "[But] it all translates into a mere US$5bn for Africa, which looks like a joke in relation to the liquidity problems African countries face.”

China, Africa’s largest bilateral lender, is also working on debt relief efforts. In January, it postponed Kenyan debt repayments due over the next six months, a week after a similar offer from Paris Club creditors. The country had been scheduled to repay US$245m between January and June.

However, private sector involvement in the process of renegotiating African debt remains highly uncertain, especially as a number of sovereigns have started to return to the capital markets, according to analysts.

The Covid-19 crisis and economic downturn in Africa has not been as bad as economists first feared at the start of the pandemic. Zambia looks set to stand out as the only sovereign default from the continent. At the end of last year, African countries started to tap the international capital markets again. A number of other sub-Saharan sovereigns could turn to the markets this year but it could be limited by the recent rise in US Treasury yields and, by extension, African borrowing costs.

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