End of the low-cost borrowing era for Africa? Costly Zambia debt sale triggers warning lights

Ghana, Angola, Tanzania and Nigeria have signalled plans to sell debt in coming months, but it may be painful as prospect of a stronger dollar lurks.

IF Zambia’s latest Eurobond is any guide, other African borrowers lining up to tap capital markets should expect a jump in borrowing costs.

Demand tumbled as costs rose when President Edgar Lungu’s government sold its third dollar bond in as many years on July 23, suggesting the era of low-cost borrowing for sub-Saharan nations is drawing to a close. Ghana, Angola, Tanzania and Nigeria have signalled plans to sell debt in coming months.

Rising fiscal deficits coupled with falling prices for raw materials from crude oil to gold, and the prospect of the first US rate rise since 2006, are making investors look twice at African issuers after a record $16 billion of Eurobond sales in 2014. Offerings this year almost halved to $2.75 billion from the corresponding period last year, according to data compiled by Bloomberg.

“You can see from Zambia’s issuance that the euphoria around sub-Saharan Africa credit is starting to dissipate, or has dissipated,” Nema Ramkhelawan-Bhana, an economist at Johannesburg-based Rand Merchant Bank, a unit of Africa’s biggest bank by market capitalization, said by phone July 24. “It does set the tone for future issuances from the region.”

Record-low borrowing costs in 2014 spurred debut Eurobond sales by Ethiopia and Kenya, while Ghana, Zambia, Ivory Coast and Senegal returned to international markets. Ethiopia paid 6.63% for a debut $1 billion sale in December. The yield has since climbed to 6.90%.

Zambia’s $1.25 billion debt sale was sold at a yield of 9.38 percent, the most ever for an African issuer in the Eurobond market, and almost 4 percentage points more than its first Eurobond in 2012, according to data compiled by Bloomberg. The yield was little changed Tuesday after climbing to 9.60 percent on Monday as copper, which accounts for more than two- thirds of Zambia’s exports, fell to a six-year low.

Numbers a turn-off
The sale attracted $2.5 billion of orders, compared with nearly $12 billion for its 2012 bonds. Gabon’s $500 million of Eurobonds sold in June was about six times oversubscribed.

While Zambia’s gaping budget deficit and declining copper revenue were a turn-off for investors, Ghana, which is planning to raise as much as $1.5 billion in September, has similar fiscal challenges. Yields on the West African nation’s $1 billion of debt maturing in August 2023 climbed 202 basis points to 9.43 percent from a record low in September.

“We do expect Ghana to come to market and there will be a premium over the existing bonds,” Yvette Babb, an emerging market strategist at Standard Bank Group Ltd., said by phone from Johannesburg. “Clearly their new issuance is going to be more expensive than their last.”

But…a silver lining
African countries with more stable economies may not be as badly punished, according to Gareth Brickman, an Africa analyst at Johannesburg-based ETM Analytics.

“While generally it appears African issuers will face tougher market conditions as the US dollar and rates rise and commodity prices fall, investors are well attuned to qualitatively differentiating,” Brickman said in a e-mailed response to questions.

A Bloomberg index tracking commodity prices fell to a 14 1/2-year low this week as economic growth in China slowed to the most sluggish pace in a quarter of a century and the dollar strengthened. Given Africa’s dependence on commodities, this will have an impact on sovereign bond yields across the continent.

In addition, a Fed rate increase would draw capital to the dollar, reducing the relative attraction of African yields, Ramkhelawan-Bhana said. Economists project a 50 percent chance of a rates liftoff at its September meeting, according to the median estimate in a Bloomberg survey.

“Regardless of a country’s idiosyncratic risks, yields across the spectrum of sub-Saharan African dollar-denominated bonds should reprice higher once the Fed begins to normalize interest rates,” Ramkhelawan-Bhana said.

—With assistance from Lyubov Pronina in London.

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