Africa’s turbulent year

It has been a rollercoaster few years for African nation states south of the Sahara. In the early part of this decade, a region once forgotten by all bar the most adventurous emerging market investors was enjoying something of a golden age.

Commodity and energy prices, flirting with record highs, had lifted all boats, while higher growth rates let even peripheral sovereigns raise debt capital from global investors. Rwanda was a case in point, the tiny central African state raising US$400m in 2013 via a debut 10-year sale of dollar bonds.

Then the market turned. At first, it was hard to notice the shift in sentiment. But as commodity and energy prices slipped, the clouds started to gather.

In its January 2017 World Economic Outlook update, the IMF said annualised regional growth would tip the scales at just 1.6% in 2017 and 2.8% in 2018, grim news for countries used to numbers in the mid-single digits. Nigeria, pummelled by stagnant oil prices, contracted 1.6% in 2016, and is on track to expand by just 0.8% in the current calendar year.

Little wonder investors at the edges have begun to cool on the region. The shift has been slow rather than sudden.

Sovereigns raised US$22.5bn spanning 58 prints in 2016, against 44 debt sales for US$16.6bn the previous year, according to data from Thomson Reuters. But S&P Global Ratings tips the 17 regional sovereigns that receive ratings from the big three agencies to borrow US$43bn in long-term debt in 2017, including domestic debt and non-underwritten deals, a fall of 19% against last year’s figure, largely due to a sharp depreciation in the region’s currencies.

At the same time, yields have spiked, reflecting investors’ concerns about a region again flirting with the age-old problems of weak currencies, slow growth and rising debt. S&P reckons the average yield on prints packaged and sold in 2016 was more than 9%, against a mean of 6% in the three years to end-2015.

Unfortunate timing

Mozambique’s government’s decision not to meet a bond repayment of US$59.8bn on January 18 of this year could thus have been better timed. Not that investors were surprised at the default on Eurobonds originally issued to finance a state-owned fishing company, Ematum, and which were retrospectively guaranteed by the state – they had already factored it in. Multilaterals, which had long warned about the parlous state of Maputo’s finances, barely offered a collective shrug.

Nor did politicians in Maputo seem to care much, despite the hit to their credit and reputation. The country is now rated ‘selective default’ on its long-term foreign currency rating by S&P, and rated B– on its local currency rating, making it the lowest rated sovereign in the region, along with Ghana and the Republic of the Congo.

Still, the news did leave more than a few investors wondering which domino might be the next to topple.

John Ashbourne, Africa economist at London-based Capital Economics, says Maputo’s debt delinquency has raised fears of more defaults to come in the months ahead. He points to the troubled oil-rich economy of Angola, the region’s third largest after Nigeria and South Africa, which is weighed down by high and rising public and private debt, low growth, an overvalued currency and an opaque government.

“Serious debt problems are more likely in Angola than anywhere else,” he said. “Their debt burden is far higher, and things could well be far worse than the government admits. They have revised downward GDP data. It’s very possible that there are a few more skeletons in the Angolan government’s closet.”

He added that the most likely near-term outcome in Angola was a rescheduling of its debt rather than an outright default.

In a November 15 research note, Ashbourne said Ghana and Zambia “look vulnerable”, given the poor quality of their finances, while Kenya also faced “difficulties over the long-term”. And he said the region’s key weakness lay not just in the growing size of its debt burden but in the structure of those collective obligations.

“A large and growing share of the region’s public debt is denominated in US dollars,” he said. “Weakening local currencies could easily push up debt ratios, as happened recently in Mozambique.” He again highlighted the example of Angola, whose currency, the kwanza, remains overvalued.

Nation states with faltering public or private sector finances include Senegal, where one-fifth of the country’s banks’ loans are classified as non-performing; Ghana, which suffered a fiscal crisis in 2015 and was forced to turn to the IMF for a near US$1bn bailout; and Zambia, a resource-wealthy country that is, analysts say, rapidly running out of cash, after seeing its foreign exchange reserves shrink by 25% in 2016, to US$1.9bn.

Not all doom and gloom

Others are more sanguine about the region’s prospects. Aymeric Arnaud, a debt capital markets director responsible for the Middle East, Turkey & Africa at Societe Generale Corporate & Investment Banking, said it was “unlikely that Mozambique’s [January] default would slash demand for regional sovereigns”.

”Investors don’t place the whole region into a single basket any more. That was maybe true a decade ago, but not any more. Investors are canny enough to distinguish between the distinct credit stories,” he said.

Arnaud pointed to Nigeria’s successful US$1bn sale of 15-year notes, which came with a higher-than-expected coupon of 7.875%. By any measure, the print was a resounding success. Launched into a tough market, it came in almost eight times subscribed, attracting interest from more than 350 global investors, including Franklin Templeton and Wellington Management.

“You have US and UK real money investors who are very anchored to that part of the world and who are very aware of the region’s dynamics,” he said.

Nor are sovereigns, if given the opportunity, likely to be shy about tapping the bond markets later this year.

Kenya, whose budget deficit widened to 8% as of end-2016, is, investors say, hopeful of completing a Eurobond in the second half of 2017 – though prospective buyers may want to take a long look at the country’s books first. Former premier Raila Odinga claimed in October that US$1bn of the funds raised in the country’s inaugural US$2.75bn print from 2014 had gone missing.

Other countries aiming to issue fresh debt securities this year include Ethiopia, Senegal and Cote d’Ivoire, which sent out an RFP on March 20, while in February, Nigerian president Muhammadu Buhari asked parliament for approval to launch an additional US$500m Eurobond to help plug the country’s growing budget deficit.

Despite the myriad challenges facing the region, most notably low commodity prices and growth rates, either of which could have negative knock-on effects on countries’ debt sustainability, Societe Generale’s Arnaud said the appetite for new prints was strong.

“We are convinced that the demand is there,” he said. “There’s still plenty of liquidity out there. Demand for regional bond issues hasn’t been materially harmed by the rising US interest rate policy, and investors are still, in a low interest rate environment, looking for yield.”

So what next? Investors still enamoured of Africa’s long-term future, of the opinion that Mozambique’s default was the exception rather than the norm, and enticed by the juicy yields on offer, are likely to continue to snap up regional prints as and when they come to market.

But investors would also be wise to be wary. The region is packed with potential and pitfalls; debt burdens are rising. Social unrest is on the rise in Cote d’Ivoire and Gabon, as the lingering effects of high unemployment and low growth begin to hurt. And commodity and energy prices show no sign of returning to earlier highs.

With that in mind, the question is whether Mozambique’s default – which the government in Maputo saw coming but did little to avert – will be the only one that blots sub-Saharan Africa’s copybook in 2017, or more are yet to come.

“It’s important not to over-generalise, but there are several countries in Africa that could easily get into trouble,” said Capital Economics’ Ashbourne. “I think the real worry is that, as with Mozambique, misleading government figures could be hiding problems that have been building for some time.”