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London - South Africa led the way with sub-Saharan Africa’s first Eurobond sale of 2016. Nobody’s following just yet.
While yields on African dollar debt have fallen from record highs in January, the drop hasn’t been enough to entice countries such as Ghana, Kenya and Zambia, which are struggling to finance widening budget deficits.
Kenya and Zambia are negotiating loans and approaching the International Monetary Fund (IMF), while Ghana pulled back from plans to sell debt in the first half.
Dollar bonds issued by 17 sub-Saharan African nations have returned 6.8% this year, compared with the 7.5% average gain for emerging-market sovereign debt, according to data compiled by Bloomberg.
"We know Ghana and Kenya would like to issue, Zambia will also need to, given its fiscal deficit, but the market is pretty much closed," said Kevin Daly, a money manager at Aberdeen Asset Management in London. "It’s unlikely they will issue before" the second half, he said.
Although average yields on African debt have come down more than 180 basis points from a high of 9.37% in January, they are still almost three percentage points above their low point of 2013, when African governments sold a record of more than $11bn of Eurobonds. Average yields on sub-Saharan debt were 7.49% on Thursday, compared with the emerging-market average of 4.87%.
Investors would probably demand premiums of as much as 50 basis points more than market yields for African issuers as the prospects of a Federal Reserve rate increase approaches, according to Union Investment Privatfonds GmbH.
"The willingness to pay a generous premium is very low among African issuers," said Sergey Dergachev, a senior money manager who helps oversee $13bn of emerging-market debt at Frankfurt-based Union Investment.
Issuers’ risks
Investors are demanding higher compensation to mitigate issuers’ risks amid falling commodity prices. Ghana only managed to pull off a deal last year at a record 10.75%, even with a World Bank’s guarantee for 40% of the debt. The yield on that bond reached almost 13% in February.
Ghana, which planned sell as much as $1bn of Eurobonds this year to finance the budget gap, met with investors in London and the US in early April. The government is studying the market for the right window of opportunity, Minister of Finance Seth Terkper said on Monday, without giving details of the time frame.
Tanzania, which has been discussing plans to obtain a credit rating and tap the Eurobond market as early as 2008, may sell at least $500m of debt in the next fiscal year depending on yield levels, central bank Governor Benno Ndulu said this week.
Debt trap
Kenya is in the final stages of arranging a $600m loan from China, following $750m it raised in a syndicated loan last year. Zambia, facing a burgeoning budget deficit amid slowing growth, is looking to agree on assistance from the IMF. Governments are also faced with weakening currencies that have increased debt-servicing costs. Zambia’s kwacha has dropped 27% against the dollar over the past 12 months.
The Washington-based lender warned African nations this week against falling into a trap by raising too much foreign-denominated debt. While spending on infrastructure could stimulate growth, nations had to strike a balance between raising debt and containing their budget deficits, said IMF First Deputy Managing Director David Lipton.
"In the absence of market financing, governments will need to meet funding needs via alternative sources such as multilateral lenders like the IMF, bilateral sources or commercial loans," said Mark Baker, who helps oversee $1.3bn in emerging-market debt at Standard Life Investments in London.
