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African Eurobonds: What to watch in 2014
January 28, 2014
   
   
Last year was the biggest to date for Eurobond issuance by sub-Saharan African sovereigns. Rwanda, Nigeria, Ghana, and Gabon issued $3.9 billion in U.S. dollar-denominated Eurobonds, in addition to TanzaniaaEUR(TM)s $600 million private placement and MozambiqueaEUR(TM)s $500 million in loan participation notes. All told, it was a $5 billion year.

Eurobonds, which are issued in currencies other than those of the borrowers, have offered these countries an avenue for diversifying their international financing beyond reliance on donors and concessional loans as well as an opportunity to establish a benchmark for nascent domestic debt markets. Some governments are using the funds for capital-intensive projects, such as transportation and energy infrastructure. Zambia, for example, put a large proportion of its $750 million issuance in 2012 into railway construction and a new hydroelectric project. Others, including Seychelles, Gabon, Republic of Congo, and Cote daEUR(TM)Ivoire, have borrowed to restructure previous debt.

The regional Eurobond wave kicked off in 2006, when Seychelles became the first sub-Saharan African nation outside of South Africa to sell international bonds with a $200 million issuance. Ghana followed suit in 2007, tapping the markets for $750 million. Since then, Seychelles and Ghana have returned to the market, joined by Gabon, Republic of Congo, Senegal, Cote daEUR(TM)Ivoire, Namibia, Angola, Zambia, and others.

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The story of African sovereign bond growth intersects with the global search for yield in the era of quantitative easing and near-zero interest rates. Additionally, the anemic recovery among advanced economies has led donors to cut development assistance, prompting many sub-Saharan countries to look for alternate methods of funding projects. Further, multilateral institutions, the IMF in particular, encouraged the use of bonds by select African countries based on strengthened economic fundamentals and increased diversification.

Spurred by the expected rise in advanced economy interest rates, other African nations are looking to tap international capital markets as well. In 2014, Senegal, which accessed the capital markets in 2009 and 2011, will likely do so again with a $500 million Eurobond issuance. Cote daEUR(TM)Ivoire is also planning an issuance between $500 million and $1 billion. It will be the West African nationaEUR(TM)s first foray back into the international bond market since missing three payments on previous Eurobonds amid post-election chaos in 2010 and 2011. Zambia may also return with a $1 billion Eurobond to fill budget gaps.

The most anticipated debut this year will be KenyaaEUR(TM)s, and it could happen soon. A regional leader in capital market development, Kenya is considering the largest sub-Saharan issuance to date at $1.5 to $2 billion, though no final figure has been announced. The funds will go toward infrastructure projects, including a new rail line from Mombasa to the interior, and to pay off a $600 million syndicated loan. Analysts believe the yield will be between 7 and 8 percent.

Cameroon and Uganda could also enter the market this year. Though it is unlikely to issue international bonds in 2014, Ethiopia is taking preparatory steps, including seeking a sovereign credit rating.

However, even with the increase in issuance and the backing of international financial institutions, it is worth asking whether this means of funding is sustainable and if it will remain popular with investors as the U.S. tightens monetary policy. On the first question, there are several areas of concern, including speculative credit ratings and default risk. In 2012, Gabon, then on the verge of default, delayed payment on its $1 billion bond. A year earlier, Cote daEUR(TM)Ivoire fully defaulted on its debt. Such risk is signaled by the below-investment-grade status of most sub-Saharan bonds. On the other hand, those countries that manage their debt responsibly and use the funds to spur economic growth have an opportunity to distinguish themselves as worthy credit risks.

At the end of the day, there is no reason to expect a retreat from bond purchases. In the face of low inflation, loose monetary policy is likely to remain the rule among central banks in the advanced economies, and the U.S. Federal Reserve is forecast to only gradually taper QE. Investors hunting for yield and diversification in this environment are likely to continue to consider African Eurobonds. Likewise, sovereigns on the continent have good reason to participate in this market.