The year 2019 started with USD$92billion worth of outstanding African dollar debt stock across 20 countries. These include Zambia, South Africa, Senegal, Gabon, Namibia, Congo Brazzaville, Tunisia, Ghana, Ivory Coast, Morocco, Nigeria, Egypt, Kenya, Ethiopia, Tanzania, Seychelles, Cameroon, Rwanda and Mozambique. This outstanding debt stock was issued on the international capital markets and in hard cash. Terms and condition are public while 89% of these are dollar denominated while 11% are in Euro’s. Of these over (53%) of the outstanding eurobonds yield above 7%.
Of the 20 eurobonds running, Africa’s most industrialized nation South Africa and North Africa’s largest economy Egypt weigh the heaviest at USD18.9billion respectively. Oil producer Nigeria accounts for USD11.2billion of the African outstanding debt stock. (These three nations are Africa’s top three heavy weights economically too).
Middle weights, include Cote d’Ivoire, Ghana, Angola, Kenya, Morocco, Senegal, Zambia, Tunisia, Gabon, Ethiopia and Namibia ranging between USD1billion and USD7.2billion. Key on this bracket is that this outstanding debt forms significant part of these economies GDP’s. Outstanding debt for Senegal, Cote d’Ivoire, Gabon and Zambia account for over 10% of their 2019 GDP.
Cameroon, Mozambique, Rwanda, Republic of Congo, Tanzania and Seychelles have only dipped their toes in the eurobond market with single market issuance’s.
Why 2018 was a tough year?
African eurobonds suffered in the tough markets of 2018. Four overlapping and negative factors hit most emerging markets (EM’s). These were: a stronger US dollar environment, US Federal Reserve rate hikes, Sino – US trade impasse and global growth slowdown (led by China and Europe). Confidence was eroded further as investors suffered haircuts in valuations Argentina and Turkey. US equities asset sell off pressure took a toll on the dollar debt markets too. These factors led to institutional (pension funds and money managers) and retail investors exiting EM’s and frontier market bond funds (that invest in African foreign currency denominated debt). The outflows from the bond funds meant sellers outwitted buyers thereby resulting is suppressed prices (yields started to rise or widen). These global factors were more dominant that local (African) nations economic fundamentals such as widening fiscal deficits, political risk and other factors in 2018.
Credit risk factors include Moody’s rating agency downgrade of five (5) countries namely: Angola, Kenya, Gabon, Tunisia and Zambia while Standards and Poor’s and Fitch rating agencies downgraded Zambia (to B-. with negative outlook). At Africa level offsetting effects were observed after S&P upgraded Ghana and Republic of Congo in September (from CCC+ to B-).
How tough was 2018?
Tracking the performance of bonds in existence at the start of 2018, the average yield on African eurobonds increased to 7.4% from 5.3%. Countries with better credit ratings (South Africa, Morocco and Namibia) were the most robust (average yields from 3.9% to 4.5%). Average oil prices were higher last year than in 2017 making oil exporting national better performers with average yields rising to 7.9% from 5.9% this compares to crude importers whose average yields widened to 8.3% from 5.9% on average.
(NB yields increase when the price paid by investors for bonds in the secondary market falls. Higher yields are bad for eurobond issuers because they suggest new borrowing will be costlier. When yields increase, the interest paid on the existing eurobonds does not change because the coupons are fixed at issuance.)
To put an increase in yield from 5.3% to 7.4% into perspective a USD$1billion 10-year eurobond with an annual interest payment (coupon) of 5.3% would cost USD$54million annually to service (and USD$540million in interest costs over its lifetime) before the USD$1billion borrowed is repaid. The same bond with a coupon of 7.4% would cost USD$74million annually to service (and incur USD$740million in interest cost over its lifetime).
Africa’s copper producer, Zambia was hardest hit (on account of waning confidence in the government to secure an IMF deal to deal debt sustainability concerns, fiscal indiscipline continued, and foreign exchange reserves waned). Also suffering above the average were Tunisia, Ghana and Kenya (each grappling with economic imbalances and debt risks). Gabon and Cameroon faced substantial political risks while Angola performed better than the average as investors bought into their IMF supported reform story. Mozambique’s only (and distressed) eurobond improved from very high yields as it appeared investors and the government were getting closer to agreeing restructuring terms.
Despite market turbulence, 2018 was a record year for issuances and observed a growing preference for euro-denominated eurobonds, and longer maturity eurobonds. The USD$25.8billion issued by African countries in 2018 makes up 28% of the current stock of African eurobonds. Angola, Egypt, Ghana, Ivory Coast, Kenya, Nigeria, Senegal and South Africa each issued 30-year denominated paper. Beyond the Mediterranean coast and South Africa, this was rare prior to 2018 and follows a trend started by Nigeria when it issued a 30-year note in November 2017.
Five things to look out for in 2019
- Market turbulence: the good news for African eurobonds is that market factors might get better in 2019. The US dollar might be softer on account of the flexible US Fed policy stance with (3) hikes or none at all expected. This follows statements by the US Fed chair Jerome Powell that stated that the US Fed is alive to global risks causing slowdown in economic pulse and also said that monetary policy is not predetermined. Inflows might return to EM bond funds. So far market conditions have been better in January 2019 and African eurobonds recovered some of their 2018 losses. The bad news is that market factors stay bad in 2019 weighed by US-China trade relations and a slowdown in global growth might slow. In either case, 2019 looks set to be a turbulent one (see an article on the risks here).
- Progress with reforms: economic growth is essential for debt sustainability. Lower deficits help, as do adequate foreign exchange reserves to buffer any external shocks. The reforming African economies, will fare best when markets are tough. Ten of the African eurobond issuers have IMF programs. Angola and Morocco were the most recent ones to sign. Kenya and Rwanda completed programs in 2018 while Ghana’s funded program expires in April this year as Egypt’s follows suit in November. Senegal’s policy support instrument will end mid-year in June. Zambia and Republic of Congo continue to talk to the IMF but nothing concrete has yet materialized.
- Improvements to debt management: large African eurobond redemption’s commence in 2022 (and remain high until 2025). Tough markets in these years would make their roll-over (by issuing new eurobonds to replace them) more complicated. Some African eurobonds issuers are working hard to smoothen their debt profiles and reduce repayment risks (often by issuing debt, then reducing the amount of existing eurobonds). Some issuers debt management is far too passive and remains very weak. Risks are lower, where debt management is stronger (i.e. economic policy coordination, an understanding of debt risks, a debt strategy, good data management, regular public reporting, good investor communication, skilled team that can negotiate good terms with potential global lenders).
- Elections: Seven African eurobonds issuers are holding elections in 2019. These include Nigeria and Senegal in February, South Africa in May, Mozambique and Tunisia at parliamentary level in October, Namibia in November, and Tunisia Presidential in December.
- New issuance: it is unlikely that we will see enough new eurobonds in 2019 to match last year’s record issuance. Only two eurobonds will mature in 2019 (USD$1.75billion from South Africa’s and USD$750million from Kenya). Those most likely to issue in 2019 include Egypt, Angola, Ghana, and Kenya.
Written by Gregory Smith. Gregory is a Director and Fixed Income Strategist for Emerging Markets at Renaissance Capital.
*This is not investment advice, and this is just for information.
