Africa's foreign debt pain: Rich returns but few buyers, and why Ghana, Zambia, Angola may just be turned away

Risk-averse investors shying away from African debt despite high interest rates, leaving many countries wondering what to do.

EMERGING-markets bonds may be experiencing the worst start to a year on record but nowhere is the pain greater than in sub-Saharan Africa.

The world’s poorest continent accounts for half of the 20 worst-performing dollar bonds issued by developing nations in 2016. It’s also the only region in the world where not one country’s debt has produced a positive return, with African securities falling 5.4% this year, compared with the average 1.3%loss in emerging markets, the worst first two weeks of a year since Bloomberg financial data company began compiling data in 2010.

The malaise means governments will find it more expensive to issue debt just when they most need financing to plug budget deficits that are widening amid a plunge in prices for commodities from oil to copper. 

While rising yields might make African Eurobonds more alluring to investors, prices are likely to fall further because of global risk aversion and the slump in raw materials, according to Standard Bank Group Ltd., the continent’s largest lender by assets.

“You’re seeing particularly violent moves in African bonds because you have an investor base retrenching from frontier markets, and the underlying fundamentals of these countries are suffering,” Ray Zucaro, chief investment officer at RVX Asset Management, said by phone from Aventura, Florida, last week. “Given the backdrop of commodity prices and fear of rising dollar rates, it’s hard to envision a lot of issuance.”

Unable to issue

Average yields on sub-Saharan African Eurobonds have surged to 9.4%, compared with 5.8% in April last year, according to the Bloomberg USD Emerging Market Sovereign Bond Index. Yields on dollar debt in Zambia and Ghana have climbed above 15%, with only Venezuela and Ecuador paying more among emerging markets.

“At these levels the markets are shut” for Ghana, Zambia and Angola, Claudia Calich, a money manager at M&G Investments, which holds securities in Zambia, Ivory Coast, Rwanda and Angola, said in an interview in London last week. “Their governments won’t be able to issue.”


South Africa’s rand has been battered in the last year.

Zambian notes are the biggest losers in Africa, with declines of more than 14%, the most among 61 developing nations tracked by Bloomberg after Venezuela. Overspending and falling copper prices helped push Zambia’s budget deficit to 6.9% of gross domestic product, from the targeted 4.6%, Finance Minister Alexander Chikwanda said in October. The country’s kwacha has weakened 42% over the past 12 months, the third-biggest decline among more than 150 currencies tracked by Bloomberg.

“We are sitting with large funding gaps and there are more questions about how these governments are going to raise the money to plug the gap,” Ridle Markus, an Africa strategist at Barclays Plc’s unit in Johannesburg, said by phone on January 14. “Look at Zambia, for example. They had a dollar bond last year, we know that they’ll struggle on the fiscal side again this year and they will need some additional funds at a time when copper prices are quite low. So the question is: how are they going to raise the money?”

Prospects

Economic growth in sub-Saharan Africa probably slowed to 3.8% last year, from 5% in 2014, accelerating to 4.3%t this year, according to the International Monetary Fund. At least seven sub-Saharan African currencies, including South Africa’s rand and Angola’s kwanza, lost more than 20% of their value against the dollar since the start of last year.

“It doesn’t appear to be the right time” to be lengthening debt holdings in African Eurobonds, Dmitry Shishkin, a London- based strategist at Standard Bank, said in a note on Monday. “We would rather miss the turnaround in bond prices than try to pick the bottom. There are tentative indications, such as improving trading volumes, suggesting that we shouldn’t be too far away.”

Ghana’s parliament in December approved plans to issue as much as $1 billion in Eurobonds this year, while the Democratic Republic of Congo is preparing to debut almost $1 billion of debt on international markets, which Prime Minister Matata Ponyo said in December will be used to invest in projects that will help boost economic growth.

Issues declined

Nigeria may also sell debt for the first time since 2013 to fund a record spending plan, Finance Minister Kemi Adeosun said last month. Kenya is also gauging investor support for further issuance, the Financial Times reported on January 14, citing Treasury Secretary Henry Rotich. 

African issuance in 2015 declined to $6.75 billion, compared with a record $8 billion a year earlier, according to data compiled by Bloomberg.

“The question is whether these countries can growth fast enough to repay their debt or whether they already have too much debt,” Antoon de Klerk, a fund manager at Investec Asset Management, said by phone from Cape Town on January 15.

“The answer lies in what they did with the money they borrowed over the past five years. Did they invest it in infrastructure, in which case there could be good results, or did they simply spend it on things like salaries, in which case it will be really difficult to generate high economic growth?”

—Bloomberg. With assistance from Matthew Hill and Lyubov Pronina.

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