African Bonds: in quest of investment

July 8, 2013 11:17 pm0 comments by:

eurobonds1In fixed income markets, “yield-hunting” currently seems to be the name of the game, and the economic crisis in the old continent make Eurobonds issued by African countries very interesting for risk-seeking investors.  A smooth meeting between supply and demand is also favored by high interest rates in domestic markets. Nevertheless, there are several aspects that should raise investors’ attentions, as not all African realities can grant the same investment success.

A recent report from Standard & Poor’s has highlighted the great interest that Africa’s bond markets have raised in recent months.  Rwanda’s $400 million Eurobond issue in April 2013 is a clear sample in this sense: the bond was substantially oversubscribed at a yield of about 7%, only half a percentage point above the average yield to maturity for a U.S. high-yield corporate bond. This trend is also confirmed by other facts: while until few years ago South Africa was the only country operating in the Eurobond market, since 2007 seven other nations started Eurobond issuance. This trend seems accelerating: Ghana for example, one of the pioneer nations in issuing Eurobonds in Sub-Saharan Africa in 2007, has recently appointed Barclays for a new Eurobond emission in 2013.

The reasons behind it are mainly two: firstly, the low returns on investments in Europe and the U.S. appear to be attracting international investors to emerging markets such as Africa. Secondly, the scarcity of local savings and a history of high inflation keep domestic interest rates very high, making it cheaper for many African countries to issue debt on the international markets rather than domestically. The gap between domestic and foreign rates is currently so wide that creates a win-win scenario for foreign investors and local governments.

Nevertheless, Eurobonds issuance in these countries also bears risks that are both economical and political. That is why it is necessary to make a reflection on these two points. These are countries with negative trade balance, heavily exposed devaluation and, in most circumstances, facing double-digit inflation. This means it will be more difficult for them to replay a debt in dollars in 10 years time if their currencies halved their values. In this sense, issuers with reserves of natural resources are less exposed to this risk because they have available sources of dollars to pay off bonds. Another important risk factor to keep in mind is how many political elections will take place during the life of a bond. The case of Ivory Coast in this sense is quite emblematic: the country has missed 3 payments after one political side rejected the results of 2010 elections, and the new government has reassured it will pay them this year. Despite that, the Eurobond has incredibly halved its yield at 7% since the beginning of 2012.

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