African countries must be prudent with eurobonds

Eurobonds have become a hot topic in Africa in recent years and are expected to feature prominently on the continent going forward. Their popularity is being encouraged by the growing dynamic relationship between African governments (seeking entry to international bond markets) and international investors (looking to invest in African bonds in their search for higher yields).

Prior to the global financial crisis, African countries had already started to tap into global debt capital markets through the issuance of international bonds. Ghana was the first country in sub-Saharan Africa (after South Africa in 2007) to issue such a bond, raising $750 million (R6.6 billion). Since then, it has been joined by Gabon, Senegal, Ivory Coast, Republic of Congo, Nigeria, Namibia and, recently, Zambia.

Namibia’s debut $500m eurobond, issued last October, was oversubscribed five-and-a-half times, while Nigeria’s January 2011 offering of the same size was two-and-a-half times oversubscribed.

In September 2012, Zambia successfully issued its debut $750m eurobond, which was a spectacular 15 times oversubscribed.

A number of African countries are looking to participate in global capital markets again as falling yields and better economic management allows them to raise dollar funding needed to sustain growth. Kenya, Tanzania and Angola are all considering issuing bonds, with Nigeria and Ghana having indicated that they were looking to tap into international markets again.

Their timing couldn’t be better. Positive sentiment towards emerging markets is running higher than at any point since the onset of the global financial crisis. In Africa’s case, the outlook for a prospective issuance is further enhanced by the fact that demand for dollar-denominated debt is already far in excess of the available supply.

With rapidly growing populations and the prospect of a slowdown in foreign aid due to the debt problems in the developed world, it has become necessary for African governments to pursue alternative and less volatile funding sources.

But there are some eurobond concerns. Investors worry about the heavy reliance on commodities in some African economies, which would thus be vulnerable in the case of another commodity price plunge. Furthermore, countries with a historical track record of poor debt management may become heavily indebted to private financial institutions and not to the World Bank or International Monetary Fund this time. This would make it harder to renegotiate their sovereign bond debt. Another risk plaguing the sovereign bond picture is unreliable statistics and the lack of transparency in some African nations.

Increasingly, international bonds are seen by governments as a way to close the gaps in their budgets. However, authorities need to be mindful that international bonds can only be viable where returns are sufficient to supplement debt servicing obligations and simultaneously supplement government foreign reserves. Furthermore, monetary policy must play an important role in maintaining currency stability, so as to avoid upside pressure on debt servicing and repayment costs.

Eurobond sellers will thus have to manage fiscal deficits with prudence and limit any shortfall in their current accounts to show that they can repay the money and maintain market confidence. Since the bonds are primarily funded through gearing, management will be a key consideration for investors. Credible systems and institutions with sound administrative capacity are essential in this regard, given the African continent’s problematic history in debt management.

Ronak Gopaldas is a country risk analyst at Rand Merchant Bank.