African sovereigns are returning to the Eurobond market but the continent's debt crisis remains unresolved. By Jason Mitchell.
A few higher-rated sub-Saharan African sovereigns are managing to tap the Eurobond market again after a long hiatus but a large number of the continent's countries continue to grapple with a severe debt issue.
Sub-Saharan Africa’s Eurobond market was entirely shut off for the whole of 2023, but three sovereigns managed to issue debt at the start of this year – Ivory Coast, Benin and Kenya. In total, they issued US$4.85bn of Eurobonds and their offerings were as much as six times subscribed, indicating that investor demand for riskier frontier market debt has returned.
Analysts also expect Nigeria to issue up to US$1bn in Eurobonds this year, while Angola and South Africa could also tap the markets. Furthermore, Kenya is indicating that it will issue foreign exchange bonds totalling US$2.5bn in several markets between July 2024 and June 2025, including Samurai, Panda and sukuk bonds.
Some North African sovereigns did enter the markets last year – for example, Morocco and Egypt – but most of the rest of the continent was shut off.
Yet borrowing costs remain elevated this year – Ivory Coast, Benin and Kenya are paying an average coupon of 8.5%. This adds up to as much as US$4bn in interest over the next 14 years, according to the Center for Global Development, a think tank based in Washington DC.
Most of the borrowed funds will be used to refinance existing – and cheaper – debt that is coming due or to plug fiscal deficits rather than for new investment programmes. Analysts say this raises questions about the long-term financial viability of borrowing at such high rates. But, with a wall of Eurobond repayments coming due over the next few years, sub-Saharan African issuers may have little option but to borrow at these elevated levels.
A surge in Eurobond issuance in the 2013–2015 period – particularly with 10-year maturities – is leading to a cascade of principal payments coming due in 2024 and 2025. This triggered the burst of new Eurobond issuance at the start of the year, aimed at securing liquidity to service previous obligations. Investors are expecting to redeem around US$11.3bn in outstanding Eurobonds, peaking in 2024.
"To put into context, the last sub-Saharan African issuances before January this year were by Angola and South Africa in April 2022,” said Churchill Ogutu, an economist at IC Group, the pan-African investment bank headquartered in Accra in Ghana. "In between, we have seen a number of North African countries – Egypt, for example – come to the market via other non-dollar-denominated Eurobonds, but sub-Saharan issuers did not come to the market for 20 months.
"Looking at the Ivory Coast and Benin issuances this year, both countries have quite solid economic fundamentals. They are members of the West African Economic and Monetary Union and their currencies are linked to the euro. That brought the countries some stability in terms of growth and in terms of inflation. They were low-hanging issuers. For Kenya, I think it was pretty much piggybacking on the issuances from Benin and Ivory Coast. [Investment banks] were able to do some market soundings and were able to advise the sovereign to move in quickly.
"The question that comes out now is – at what cost did they manage to issue? Compared to Ivory Coast and Benin, I think Kenya had the biggest hit in terms of the financing."
In January, Ivory Coast raised US$2.6bn through two bonds with final maturities of nine and 13 years. Both bear an interest rate of 8.5% and attracted more than US$8bn of orders between them, a record for a West African sovereign issuer.
In February, Benin tapped the market with a US$750m bond with a 13-year average life at an 8.375% yield – its first in the currency. Kenya followed suit and issued a final maturity seven-year note for US$1.5bn at 10.375% on the back of more than US$5bn of demand, a move that helped it to buy back a US$2bn Eurobond due in June 2024 and stave off a debt default. Kenya also plans to issue a US$500bn-equivalent Samurai bond in Japan – priced in the range of 1%–2% – by the end of June.
Among North African countries, Morocco and Egypt successfully tapped the markets last year. In March, Morocco issued US$2.5bn in two US$1.25bn tranches. The first came with a maturity of five years and a rate of return of 6.22% on a coupon of 5.95%, while the second had a 10.5-year maturity and a rate of return of 6.602% on 6.5% coupon.
In October 2023, Egypt successfully issued a Rmb3.5bn (US$479m) three-year sustainability Panda bond. It was the first sovereign on the continent to issue a Panda bond, underscoring its commitment to access previously untapped sources of capital. The African Development Bank and the Asian Infrastructure Development Bank provided partial credit guarantees, which helped crowd in investors and secure competitive terms for the transaction, proceeds of which were earmarked for green objectives under its sovereign sustainable financing framework.
Triple whammy
However, during the past few years, African economies suffered the triple whammy of the Covid-19 pandemic, the Ukraine conflict and a surge in global interest rates. Consequently, the vast majority lost access to international capital markets throughout 2022 and 2023 – borrowing in foreign currency-denominated debt became prohibitively expensive. A picture of negative sovereign credit ratings dominated the African credit landscape in the second half of 2023, owing to the growing fiscal pressures in some African countries, coupled with concerns over the wall of Eurobond maturities due in 2024 and 2025. Instead, African countries tried to maximise concessional lending, which comes at a lower interest rate.
Yet the successful issues this year indicate that the tide may have finally turned. At the start of 2024, a decline in 10-year US Treasury yield to around 4% made it easier for African states to issue dollar bonds at yields below the double-digit level, when doubts about future debt sustainability normally price countries out of the market. But the increase in that yield to around 4.5% in June – over concerns that the US Federal Reserve may take longer to lower interest rates than investors had previously thought – suggests the window for African sovereign issuance could be closing already.
Furthermore, many African sovereigns still cannot access markets because of high debt levels and poor credit ratings. For example, two of Africa’s biggest economies – Ghana and Ethiopia – remain locked out of the markets and are undergoing a debt restructuring.
Open window
"The window is still open for other sovereigns to issue if they want," said Ogutu. "There are ongoing geopolitical risks that have led to some specific tightening in some specific markets. I think it boils down to the potential issuers."
Charlie Robertson, head of macro-strategy at FIM Partners, a specialist investment manager focused on emerging and frontier markets headquartered in Dubai, says financing conditions improved markedly between the start of 2023 and the start of 2024.
“What’s the story? One primary story here has been the role of the IMF," he said. "The IMF has been driven very much by its head, Kristalina Georgieva, who is keen to get re-elected for a second term in September. Her support to Argentina, Pakistan, Kenya and Egypt has reassured the markets that there is a backstop, that the multilaterals will come in and support these credits even if the private sector is very risk-averse. Once you have that backstop of support, confidence recovers.
"It’s not just the IMF saying, 'we will give money to everyone and anyone'. We have also seen governments accept the new reality, and that’s meant maintaining the horribly overvalued currencies in Egypt or Nigeria – and to a lesser extent in Pakistan or Kenya – was no longer tenable."
Yet experts say that the contraction of new debt to settle an old debt and at an even higher rate is not the solution, as this could pile up an unsustainable burden. The average debt ratio in sub-Saharan Africa has almost doubled in just a decade – from 30% of GDP at the end of 2013 to 65% today, according to the World Bank. In December 2023, 22 sub-Saharan African countries were at high risk of external debt distress or already in debt distress. Africa’s total external debt increased to US$1.15trn at the end of 2023 from US$1.12trn in 2022, according to the World Bank.
"African sovereigns should be limiting their foreign borrowing at these kinds of yields,2 said Isaac Matshego, an economist at South Africa's Nedbank. "Currencies remain under pressure and foreign borrowing only raises the currency mismatch risks. These countries still lack the capacity to issue bonds in international markets but denominated in the local currency. That kind of issuance carries risks as the local markets are so shallow. First, there would only be a limited opportunity for foreign investors to sell those bonds in the local markets if they wanted to sell out. Second, no hedges exist – in other words, there are no swaps to hedge against a significant currency decline."
More expected
Despite the current high yields, analysts expect other African sovereigns to issue Eurobonds this year. Nigeria has a US$1.2bn issue coming due in 2025 and that could incentivise the sovereign to tap international markets again this year rather than using up its foreign exchange reserves.
Robertson said Nigeria has made it clear that it would like to issue this year but only at a yield below 9%. "If US Treasuries are sitting up at 5%, let's say, in two to three months, will Nigeria issue? Probably not in the middle of this year," he said. "It might well come back in September in the hope that US Treasuries are back down. The US Treasury story does make a difference. The question then is what spread do [investors] need over US Treasuries?
"When you think that there is no IMF backstop, when you think that the government has an overvalued currency and an irresponsible fiscal policy, then no spread is high enough. When you know that there is an IMF backstop, the currency is cheap and the government is doing something on the fiscal side, then you can afford to lend at a lower spread – perhaps 9%–10% in dollars is still worth the risk."
Ogutu agreed Nigeria could issue a Eurobond this year. "Issuers such as Nigeria have carried out some reforms on foreign exchange," he said. "It has gradually returned to foreign exchange orthodoxy; it has pretty much eliminated the parallel rates. Also, in terms of its monetary policy, we have seen its central bank be quite aggressive recently. But, amidst all these reforms, there has been a dip in the country’s foreign exchange reserves. Nigeria now needs to go back to the international market to shore up its foreign exchange reserves."
In April, the Nigerian government indicated it would like to issue a domestic bond denominated in dollars. Nigerians have around US$30bn in savings held in domiciliary accounts, which the government would like to tap into.
Furthermore, Angola also has an US$860m Eurobond coming due next year and needs to rebuild its foreign exchange reserves. It could be tempted to tap the markets this year or at the start of next, as well. South Africa is highly rated in comparison with its sub-Saharan African peers. It may also decide to test the markets now that May's elections are out of the way.
However, following an US$8bn IMF bailout and a US$35bn investment package from Abu Dhabi at the start of the year, Egypt will probably not need to issue bonds again this year.
Since South Africa’s inaugural Eurobond issuance in 1995, the African Eurobond market has witnessed significant growth, with participation from over 21 countries by 2023. This expansion mirrors the continent’s urgent demand for capital to fuel infrastructure development and manage essential imports. Over the years, Africa has come to rely on the Eurobond market to finance budget deficits, infrastructure provision and debt service. As of the third quarter of 2023, the face value of African sovereign Eurobonds stood at US$142bn, with a market value of around US$125bn, according to Gregory Smith, a lead economist at the World Bank.
Payback time
Yet some countries – including Ghana – tapped the Eurobond market too heavily and now face a severe debt crisis. Three African countries have defaulted on their external debt – Zambia, Ghana and Ethiopia – since the pandemic. Since 2020, two – Ghana and Mozambique – have also defaulted on domestic obligations, while five – Angola, Ethiopia, Kenya, Uganda and Nigeria – have engaged in non-commercial debt exchanges, according to S&P. Egypt, Ethiopia, Ghana, Kenya and Tunisia are facing pressing repayments in 2024 and 2025.
Zambia’s US$4bn debt restructuring has been a protracted affair, hindered by creditor disagreements in November. But, at the end of May 2024, Zambia's ministry of finance said 90% of international bondholders had accepted its restructuring proposal, paving the way for it to emerge from the lengthy default. Under the plan, bondholders would swap three existing instruments due to mature in 2022, 2024 and 2027 into two amortising bonds.
Meanwhile, Ethiopia is still navigating a restructuring under the G20 Common Framework amid a civil war and pandemic fallout. Ghana – in the throes of its worst ever economic crisis – is also working towards restructuring its US$13bn in Eurobond debt after its default.
Tunisia's economic crisis is compounded by pending Eurobond maturities and challenging IMF negotiations. After borrowing from its central bank, the country managed to meet a €850m Eurobond repayment on February 17. In total, it must pay US$4bn of foreign debts in 2024 – a jump of 40% from 2023 – amid a scarcity of external finance.
Kenya seems to have narrowly missed a debt default this year, helped by the lower yields available at the start of 2024.
The World Bank granted the government a new US$1bn budget facility, in addition to the US$1bn approved in May 2023. The sovereign cannot use the money for debt repayments but the facility helped free up funds from the national budget, creating a fiscal space which could be deployed for debt servicing.
Furthermore, the IMF disbursed a total of US$684.7m in January 2024 and expanded the financing package by US$941.2m to US$4.4bn, while extending its duration by 10 months to April 2025. Kenya's finance ministry initiated the buyback of the US$2bn Eurobond on 5 February this year. It is expected to be fully repaid before the bullet payment due on June 24 2024, through rolling over or swapping the remaining principal.
"There are a lot of Eurobonds falling due," said Thea Fourie, head of economics and country risk at S&P Global Market Intelligence. "It means that governments have to think about refinancing, as we have seen in the case of Kenya. We do see economic growth picking up but there are a lot of vulnerabilities in Africa – geopolitical developments, climate events, a lot of infrastructure bottlenecks. You either have to get growth going or you have to bring down your fiscal deficit and your needs for financing, or you have to strengthen your local capital markets. Those are the options that African countries have. Get growth going, bring down your fiscal deficit, or enhance your domestic capital markets. But these are all difficult structural issues to address."
Today, with many African sovereigns confronting challenges in the debt markets, some countries are actively seeking alternative funding sources. Innovative financing methods – including social impact bonds, green bonds and diaspora bonds – are being explored. Panda bonds could be another option in the future. This strategic shift aims to diversify funding mechanisms and reduce dollar-denominated Eurobond dependency. After all, sub-Saharan African debt is predominantly issued in US dollars, accounting for 83% of all hard currency government bonds in the region, according to the European Investment Bank.
By 2010, most African sovereigns had managed to reduce their debt to a sustainable level following the IMF and World Bank’s Heavily Indebted Poor Countries initiative. Unfortunately, during the past 15 years, a large number have become highly indebted again, this time around assuming a lot of expensive commercial debt from private sector creditors. While the return to the Eurobond market offers a lifeline for some, sustainable debt management practices and diversified funding sources are vital for long-term financial stability and economic growth.
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