Debt, particularly foreign currency debt, has become an important source of development finance for African economies. But as John Mbu writes, in the area of foreign debt, Eurobonds – issued in currencies other than those of the originating country and/or company – are the most prominent. But what are the lessons?
In 2006, Seychelles was one of the first Sub-Saharan Africa (SSA) countries to make its foray into the international financial markets with the issue of its $200 million Eurobond. Since then, several other SSA countries (Ghana, Gabon, Senegal, Nigeria, Namibia, Côte d’Ivoire, Zambia, Rwanda, Kenya, Ethiopia) have issued Eurobonds, with values generally ranging from $500m to $1bn. The total value of yearly issues of Eurobonds by SSA governments rose from just about $200m in 2006 to $6.3bn in 2014 and was about $4bn in 2015. Meanwhile the total cumulative value of all Eurobond issues over the same period stands at $18.55bn.
Worthy of note is the fact that, as shown in the illustration (right), some countries have tapped the international markets more frequently than others. Such is the case with Ghana, which has tapped the market four times and then, Gabon, Senegal and Zambia which have each gone to the market thrice; meanwhile Nigeria and Côte d’Ivoire have issued bonds twice and finally Kenya, Ethiopia, Seychelles, Namibia and Rwanda have issued Eurobonds just once.
Investor interest, particularly from the US and Europe, in taking up these SSA bonds has been very high, to the extent that almost all of these issues have been oversubscribed, sometimes up to ten times, as was the case with the $750m bond issued by Zambia in September 2012. This bond received orders from investors to the tune of $11bn – over twelve times the amount the country intended to raise. Zambia’s $1bn Eurobond in 2014 also received investor orders to the tune of $5bn. In addition to Zambia’s Eurobonds, Rwanda’s maiden $400bn bond in 2013, Senegal’s $500m bond in 2014 and Côte d’Ivoire’s $750m bond in 2014 were eight times oversubscribed, as was Kenya’s $2bn bond in 2014, which was four times oversubscribed.
The keen investor interest in SSA countries’ bonds is, in addition to the continent’s stellar economic growth (5%+) and macroeconomic stability over the past decade, principally because of the record low interest rate levels in the US and in the developed markets as a whole. The low interest rates were instituted by the major Central Banks of the world, principal of which are the US Federal Reserve, the European Central Bank and the Bank of England, in a bid to stimulate their ailing economies. These low interest rates therefore motivated investors to look for more profitable investments away from their home markets and these they found in SSA countries’ Eurobonds which offered far higher yields (interest rates) than those offered by investments in the developed markets.
Eurobonds have become a very significant source of development finance, particularly infrastructure funding, for SSA countries and more of these will be issued in the near future, either by the 11 countries above or by any other country that has never been to the market before. Cameroon, Angola and Tanzania – amongst others – are planning to issue Eurobonds very soon but these should, ideally, not be in the next two or three months as the markets are presently somewhat volatile; particularly as a result of China’s economic woes. The interest rates paid for any bond issued now will definitely be significantly high. This sort of explains the slowdown and/or drop in the number of issues in 2015 so far.
Another important factor that future Eurobond issuers should closely watch out for is the decision of the US Federal Reserve on interest rate movements. Any interest rate increases by the US Fed, which many speculated could occur by December 2015, will result in higher interest rates being paid by Eurobond issuers.
To summarise, Eurobond issuers should ensure that the proceeds from the bonds are used to finance infrastructure projects and not to finance budget deficits. The relatively high interest rates (9.375% and 10.75%) paid by Zambia and Ghana for Eurobonds they issued in July and October 2015, respectively, are an indication that the international financial markets somewhat “punish” countries that use bond proceeds to finance budget deficits. In addition to the fact that the Zambian currency, the kwacha, has lost over 20% of its value in 2015, economic growth in Zambia dropped from 9.2% in 2009 to 6% in 2014, while the fiscal deficit expanded from 4.5% of GDP to over 8.2% and the government debt (as a ratio of GDP) rose from 20.5% to 28.8% over the same period.
Ghana’s currency, the cedi, has also lost over 30% of its value this year. Economic growth in the country dropped from 6.5% in 2007 to 4.2% in 2014, while the fiscal deficit expanded from 8.3% of GDP to 10.5% over the same period. The government debt (as a ratio of GDP) doubled from 35% in 2009 to almost 70% in 2014.
Closely related to the above is the fact that the markets also “reward” countries with positive macroeconomic balances. Gabon, which has run external trade, current account and fiscal surpluses for several years, paid interest rates in the neighbourhood of 6% for all its Eurobonds, relatively lower than those paid by its peers. In addition to Gabon, Senegal has also paid lower interest rates for each subsequent Eurobond – from 9.25% in 2009 to 8.75% in 2011 to 6.25% in 2014, while its fiscal deficit has also remained the same, at 7.9% of GDP between 2009 and 2014. Economic growth in Senegal rose from 2.4% in 2009 to 3.5% in 2014. SSA nations should therefore work hard towards reducing their fiscal deficits and stabilising their macroeconomic frameworks, as a whole. These countries should also create good institutional frameworks for debt management, as Nigeria has done with the creation of the Debt Management Office some years ago. The West African Economic and Monetary Union (WAEMU) also recently set up a regional agency – Agency UMOA-Titres – to support the issuing and management of sovereign bonds.
The US dollar appreciated in value over the last year, and is not expected to reduce in value in at least the next 12 months. The plunge in commodity prices has also drained countries’ international reserves, thus reducing the stock of funds for monthly Eurobond interest payments. Most, if not all, Eurobonds issued by Sub-Saharan African nations have been in US dollars. This led to significant increases in the present nominal values of the Eurobonds, over and above the values at the time when the bonds were issued. In the last year, the Ghanaian cedi – for example – lost over 40% of its value vis-à-vis the US dollar. This has led to a surge in the nominal value of its $750m 2007 Eurobond to over $3bn in 2015. SSA nations wanting to issue Eurobonds will therefore have to use financial risk management instruments such as derivatives (options, currency swaps) that will prevent the nominal values of the bonds from rising.
The risks of international currency borrowing are high as opposed to those of domestic currency borrowing, even though the latter usually have relatively short maturity periods (about five years), which is a potential source of liquidity risks. Countries should therefore continue developing their domestic financial markets, in order to enable them to issue bonds in local currency. This will be a long-term hedge from the risks of international currency borrowing. NA