Infrastructure-hungry Africa issued a record $16bn in Eurobonds last year. 2015 could be different


In 2014, Ghana, Zambia, Ethiopia and Kenya were among countries that took advantage of all-time low borrowing costs in dollars to fund infrastructure.

As Cote d’Ivoire prepares to sell sub-Saharan Africa’s first Eurobond of 2015, the strengthening dollar risks curbing issuance across the continent as debt payments for governments grow more expensive.

Sales will probably decline from last year’s record $16 billion as issuers fret about exchange rates amid the drag placed on local economies by slumping oil, according to Rand Merchant Bank. Last year, Ghana, Zambia, Ethiopia and Kenya were among countries that took advantage of all-time low borrowing costs in dollars to fund infrastructure from roads to power projects.

The dollar’s advance versus African currencies over the past nine months, sparked partly by speculation the Federal Reserve was preparing to raise interest rates, makes it costlier for nations to pay interest and principal with local currency. That’s being exacerbated for oil-producing countries, which have seen dollar revenues tumble amid the 52% drop in crude prices since last year’s peak in June.

“The mindset has changed,” Nema Ramkhelawan-Bhana, an Africa analyst at RMB, which is owned by FirstRand Ltd., the continent’s biggest banking group by value, said by phone from Johannesburg on Thursday. 

“We’re worried about individual countries’ capacities to pay the interest, not only the nominal amount. Investors are going to become far more punishing of the sovereign for any type of fundamental weaknesses they have.”

Worst performer
The exchange-rate risk of sovereign bonds sold by sub- Saharan African governments between 2013 and 2014 threatens losses of $10.8 billion, equivalent to 1.1% of their gross domestic product, the Overseas Development Institute, a UK research centre, said in a report on January 28.

Only four of 24 African currencies tracked by Bloomberg appreciated against the dollar since the beginning of May, shortly before the Fed said it would start reducing monetary stimulus. Nigeria’s naira is the worst performer, falling 17%, while Ghana’s cedi dropped 16% and the Kenyan shilling 5% The naira weakened 0.5% to 193.35 per dollar, heading for a record close, by 6:41 a.m. in Lagos.

Yields on Nigeria’s $500 million of Eurobonds due July 2023 have soared 199 basis points since the end of May, more than similar-maturity Russian dollar debt. That contrasts with yields for 29 out of 31 sovereign markets in Eastern Europe, the Middle East and Africa, which fell in the period, according to data compiled by Bloomberg.

Lower risks

Cote d’ Ivoire, the world’s biggest cocoa producer, will begin marketing a Eurobond to investors in London next week, Prime Minister Daniel Kablan Duncan said Thursday. The nation returned to international debt markets in July, raising $750 million of 10-year notes with demand exceeding supply by more than six times. The sale came less than four years after the country defaulted on more than $2 billion of notes during a disputed presidential election.

Risks for Cote d’Ivoire are lower than for some other African sovereigns, as the nation’s currency, the CFA franc, is pegged to the euro and the country is a net importer of oil, said John Ashbourne, an economist at Capital Economics Ltd.

“An investment in improving infrastructure would more than pay for itself by improving the country’s growth prospects,” Ashbourne said via e-mail from London on February 2. Yields on Ivorian debt due July 2024 fell ten basis points to 6.23% on Thursday.

With developed-nation interest rates at or near record lows, investors clamoured for higher-yielding African debt last year, Ramkhelawan-Bhana said. That is set to change as higher rates in the US give investors more options, she said.

“I don’t think we’re going to get that flurry of issuance that we saw last year,” she said. “This year is going to be far more measured. We might have two or three big issuers, but we definitely won’t see the volumes we saw in 2014.”

—With assistance from Paul Wallace in London and Olivier Monnier in Abidjan.

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