High borrowing appetite by African countries has added to the fact that debt, particularly foreign currency debt, has become an important source of development finance for African economies. In the suite of foreign debt, Eurobonds (bonds issued in currencies other than those of the originating country and/or company), have become the most talked about.
In 2006, the Seychelles was the first sub-Saharan Africa (SSA) country, ex-South Africa, 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, Angola and Cameroon) have issued Eurobonds, with values generally ranging from $500 million to $1 billion. The total value of yearly issues of Eurobonds by SSA governments rose from just about $200 million in 2006 to about $6.3 billion in 2014 and 2015 so far, as can be seen in the figure below, meanwhile the total cumulative value of all Eurobond issues over the same period stands at $20.8 billion.
Source: Brookings & Dealogic
As is illustrated, 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 that have each gone to the market thrice; meanwhile Nigeria, Côte d’Ivoire have issued bonds twice and finally Kenya, Cameroon, Angola, Ethiopia, Seychelles, Namibia, Rwanda have issued Eurobonds just once.
Investor interest in sub-Saharan Africa’s Eurobonds
The investor interest, particularly from the US and Europe, to take 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 $750 million bond issued by Zambia in September 2012. This bond received orders from investors to the tune of $11 billion - over twelve times the amount the country intended to raise. Zambia’s $1 billion Eurobond in 2014 also received investor orders to the tune of $5 billion. In addition to Zambia’s Eurobonds, Rwanda’s maiden $400 million bond in 2013, Senegal’s $500 million bond in 2014 and Côte d’Ivoire’s $750 million bond in 2014 were eight times oversubscribed as was Kenya’s $2 billion bond in 2014 that 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 in 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 - an important source of development finance, particularly infrastructure finance
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 13 countries above or by any other country that has never been to the market before. Tanzania, for example, is planning to issue a Eurobond in late 2016, after securing a credit rating from Fitch. Due to the challenges in the global economy (China’s economic slowdown, the general economic malaise in emerging markets particularly Brazil, Russia, Turkey and South Africa, the Greek debt crisis, the migration crisis in the European Union, the conflicts in the Middle East and the December 2015 increase in the US base interest rate), the present market conditions are unfavourable and so interest rates paid for any bond issued now will definitely be significantly high.
With this in mind, SSA nations that intend to issue Eurobonds should ensure that the proceeds from the bonds are used to finance productive investments and not channeled to finance fiscal budget deficits. The relatively high interest rates (10.75%) paid by Ghana for its October 2015 Eurobond are a reminder that funds raised in international financial markets are costly and ought to be used for intended purposes that yield high returns, thus leaving budget deficits out of scope. In addition to the fact that Ghana’s currency, the cedi, has also lost over 30% of its value this year, its fiscal deficit has expanded from 8.3% of GDP to 10.5% between 2009 and 2014. Meanwhile, Ghana’s government debt (as a ratio of GDP) doubled in the same period.
The impact on sound macroeconomic management on the interest rates paid for Eurobonds
An analysis of interest rates paid by the SSA countries for Eurobonds suggests that markets “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 neighborhood 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 as 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 stabilizing 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. Finally, it is important to point out that prudent borrowing, either in the domestic or international markets, is essential in maintaining macroeconomic stability and promoting growth.
Risk management instruments for Eurobonds
The US dollar has been appreciating in value for over a year now, and is not expected to reduce in value in the next 12 months at least. 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 nations have been in US dollars. This has 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 - has lost over 40% of its value vis-à-vis the US dollar. This has led to a surge in the nominal value of its $750 million 2007 Eurobond to over $3 billion 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. Cameroon, for example, obtained a €500 million, currency swap arrangement from the African Development Bank for its November 2015 $750 million Eurobond issue. 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 issue bonds in local currency. This will be a long term hedge from the risks of international currency borrowing.