Governments in Africa issued a record amount of debt in international markets in 2014, taking advantage of strong investor demand and low borrowing costs ahead of the Federal Reserve’s expected rate increases this year. While a rising dollar could make repayments more difficult, analysts say the proceeds of the bonds could feed continued strong economic growth in Africa, if invested in badly needed infrastructure rather than consumer spending.
Ethiopia, with GDP per capita of $632, issued $1 billion in its first-ever eurodollar bond in early December, becoming the poorest country ever to tap the global sovereign bond market. The 10-year bonds, yielding 6.625%, attracted $2.6 billion in bids, mainly from funds in the US and Britain. Deutsche Bank and J.P Morgan managed the sale.
William Jackson, senior emerging markets economist at Capital Economics, says: “African countries’ borrowing as a share of GDP has not been large. If the proceeds are spent on capital investment, this will produce greater returns and improve the ability of these countries to repay.”
Ethiopia, Africa’s fastest-growing economy, plans to invest in hydropower and rail projects, as well as sugar plantations. Although the country’s public finances are in good shape, there are questions about its governance, weak institutions and violent potential, Jackson says.
The Ethiopia bond brought Africa’s sovereign debt issuance for 2014 to a record $11.6 billion, up from $9.7 billion in 2013, according to Standard Bank of South Africa. “African growth is still outpacing much of the rest of the world, and with that expansion comes a growing need to fund infrastructure investment,” says Megan McDonald, global head of debt primary markets at Standard Bank.
“Despite some of the global challenges, Africa is still issuing [debt] and investors are still buying up that issuance,” McDonald says. “Investors in international markets continue to look for yield in spite of the fact that quantitative easing has come to an end.”
Rate rises in the US have been expected for a long time and are not likely to cause a dramatic rise in yields in emerging markets, says Jackson. “The Fed will move slowly, and any increases will be gradual,” he notes.
In the largest debut for an African country in the sovereign bond market, Kenya raised $2 billion last June in five-year and 10-year bonds, and added another $750 million bond tap to the issue in December. In September, Ghana sold $1 billion of bonds ahead of the arrival of an International Monetary Fund mission to help it cope with a large fiscal deficit, dwindling foreign exchange reserves and worsening inflation. The issue was oversubscribed at a yield of 8.25%, or 572 basis points above US Treasurys.
Finance ministers of some African countries may become a bit more cautious as US rate increases draw near, Jackson says, “but it is certainly possible that there will be more issues.” Rwanda, which had a successful $400 million international bond sale in 2013, says it may sell as much as $1 billion in dollar-denominated bonds this year.
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