http://blogs.ft.com/beyond-brics/2014/09/09/is-africas-bond-rush-too-risky/
Is Africa’s bond rush too risky?
Sep 9, 2014 10:42am
by Mian Ridge
10
African countries have been issuing bonds at a furious pace: the value of foreign currency sovereign bonds issued so far this year has already overtaken last year’s total (see chart below). That has raised concerns that they are vulnerable to tightening by the US Federal Reserve, which could result in cash being pulled from EMs.
But analysts tend to think African bonds will withstand changes to monetary policy in the US, with yields holding steady.
Source: Capital Economics
In a note, Capital Economics acknowledged that the “clear risks” to borrowing in foreign currencies included exposure to exchange rate risk and substantial yield increases. The most likely trigger for a bond and currency sell-off was a rise in US interest rates, it said, potentially sparking turbulence in EM financial markets reminiscent of last years’s “taper tantrum”.
But history probably wouldn’t repeat itself, it said. Though the Fed would probably tighten more quickly than generally expected, it would likely be a gradual process rather than a slamming on of the brakes:
our view is that underlying Treasury yields will only drift upwards over the next few years. Even if the costs of servicing foreign currency debt rise, governments’ ability to repay is generally much stronger than it was a decade ago. African economies have grown fairly quickly over this period, so relative to GDP, the value of bond issuance this year looks less of an outlier.
Andreas Kolbe, an EMEA strategist at Barclays agreed. “I don’t think there is any reason to be particularly concerned about African bonds in the event of Fed tightening at this stage,” he told beyondbrics. “Tighter monetary conditions in the US are unlikely to lead to a pullback from EM comparable to what we saw last year”.
He said that while last year’s outflows were primarily retail-driven, institutional allocations to EM had proven to be more strategic and sticky. “With the increased weight of institutional investors in the market now and given that any US rates re-pricing is likely to be much more gradual this time, we think higher-spread EM credits with supportive bottom-up fundamentals – including some African issuers – should not be overly sensitive to US tightening,” he said.
Source: Capital Economics
African countries, many of which have growing economies but pressing infrastructure needs, have come to regard bonds as an efficient means of raising funds. Through foreign currency bonds, as Capital Economics points out, they can attract investors who won’t hold African currencies in their portfolios. Bonds also allow them independence from multilateral institutions like the International Monetary Fund. It is cheaper for them to issue in US dollars than in their own currencies. And in recent months they have wanted to take advantage of cheap borrowing as central banks keep interest rates low.
Some, though, have warned that borrowers should not become dependent on what may be a temporary period of cheap loans. The IMF has warned African governments of the risk in taking on more debt via sovereign bonds.
Ghana raised some eyebrows this month when, a few weeks after
seeking an IMF bailout it said it would
raise money from international bond investors. The country is trying to fix a growing budget deficit and rising inflation.
Seth Terkper, Ghana’s finance minister, said the country planned to raise up to $1bn, which might also refinance an existing 2017 bonds, via a swap.
The west African country issued $750m in international bonds in 2007, becoming the first mainland sub-Saharan African country other than South Africa to tap foreign debt investors. Investors poured into the bonds, in part because the major cocoa-growing country was expected to reap a windfall from newly discovered oil fields.
But oil output grew slower than expected, failing to keep up with a surging government wage bill.
Uganda recently held up Ghana as a bad example when it said it would
not seek to issue dollar-denominated debt.
But other African countries have not shared Uganda’s view. Ghana’s plan follows bond sales by Kenya, Senegal and the Ivory Coast.
Senegal’s 10-year bond, issued in July, received offers equal to eight times the $500m it raised. The week before, the Ivory Coast attracted $5bn of orders on a 10-year $750m bond. In June, Kenya received $8bn of orders on its $2bn issuance – the biggest ever debut sovereign bond for an African country.
