What’s With All The International Sovereign Bonds Being Issued By African Governments? (Part 1)

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The Kenyan government successfully launched its debut Eurobond this month and ‘secured bids worth $8 billion (Sh702.4 billion); Treasury will accept $2 billion (Sh175.6 billion)’ [1]. The Kenyan Eurobond is a big deal for Africa because it is the largest ever debut for an African country. However, international sovereign bonds have been gaining popularity amongst African countries and, ‘Sub-Saharan Africa (SSA) issued a record $4.6 billion in 2013 in sovereign bonds (5% of developing country sovereign-bond issues), up from zero in 2010 (and around $1 billion in 2001).’[2]  Thirteen other SSA countries have issued Eurobonds so far: South Africa, Seychelles, Republic of Congo, Côte d’Ivoire, Ghana, Gabon, Senegal, Nigeria, Namibia, Zambia, Tanzania, Rwanda and Mozambique. [3]

But there are four core questions to ask here:

1. Why are international sovereign bonds becoming so attractive to African governments?
2. Why are international bonds floated by African governments so well received in global markets?
3. What are the risks and challenges?
4. Can international sovereign bonds change the way African governments manage public funds?

The first two questions will be answered in this post and the rest in part 2.

Sovereign bonds carry significantly higher borrowing costs than concessional debt does so the question is:

1. Why Are International Sovereign Bonds Becoming So Attractive To African Governments?

Image(Source: Moody’s)

Consider the following:

a. Governments Need The Money
Africa’s development needs are huge and need money to address them. Africa has significant infrastructure requirements such as, ‘electricity generation and distribution, roads, airports, ports, and railroads’.[4] Funds raised through Eurobonds are an effective means of financing such infrastructure projects which often, ‘require resources that exceed aid flows and domestic savings’.[5]

b. Gives Government More Autonomy
Foreign aid and funding from multilateral institutions as well as development financing institutions come with conditions as do funds from unilateral agreements with other governments. International sovereign bonds give African governments more choice and negotiation power to define how the funds will be used.

c. Allows Government To Restructure Debt
African governments are using international sovereign bonds to restructure their debt by, ‘exchanging an outstanding sovereign debt instrument for new debt instruments’ thereby ‘allowing debt rescheduling or reduction’. [6] The Kenyan government seems to be among those employing this strategy since part of the Eurobond will be used to ‘retire a $600 million (Sh52.2 billion) syndicated loan’. [7] Kenya is not alone; four other African countries (Seychelles, Gabon, Republic of Congo and Côte d’Ivoire) issued international bonds in the context of debt restructuring. [8]

Image

d. Reduces Pressure for Credit In Domestic Markets
Successful international bond issues reduce pressure for credit in domestic markets. In Kenya, a failure with the issue may not have augured well for domestic borrowers as government appetite may have crowded out borrowing from individual and corporate consumers. Thus in issuing Eurobonds, African governments leave the credit space more open which allows more businesses and individuals to access this credit and in doing so, ‘support domestic investment and growth, and help develop the local capital market’. [9]

e. Diversifies/ Broadens Sources of Investment Finance
International bond issues broaden the country’s investor base as, ‘governments diversify sources of capital and reduce reliance on bank financing from abroad and official financing.’ [10] They also allow governments to reduce budgetary deficits in an environment in which donors are not willing to increase their overseas development assistance. [11]

f. Reduced Sovereign Debt
The Highly Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) significantly reduced the debt of African countries. In fact, multilateral creditors, bilateral aid organizations, export credit agencies, and private creditors have delivered about $100 billion of debt relief to African economies since 2000. [12] This has allowed African governments to, ‘borrow in international markets without straining their ability to repay’. [13]

g. The Conditions Are Right
Africa is operating in a context of easy global financial conditions due to, ‘record low interest rates in developed markets and ample liquidity’. [14] As a result, sub-Saharan African countries have been able to borrow at ‘historically low yields’ sometimes even lower than those of Eurozone crisis countries. [15]

Image

h. Benchmarking
International sovereign bonds give African governments the opportunity to develop a benchmark for pricing other government and corporate bond markets in international markets.[16] Ergo, African governments can use insights gained in international bond issues to develop subnational (e.g. parastatal) and corporate bonds thereby enhancing African access to international capital markets. [17]

i. Signals Support for Planned Activities
In many ways, ‘the successful issue of an international bond gives a signal of approval of current and planned economic policies’. [18] This provides grounds on which African governments can rationalize economic and development plans to both local and international parties.

Image

 

So it is clear that there African governments have solid reasons to issue international sovereign bonds, but…

2. Why Are International Bonds Floated By African Governments Being So Well Received In Global Markets?

a. High Yields
Investors looking for high bond yields are increasingly buying African sovereign debt because the, ‘debt sales offer exposure to growing economies, with a better return than they would receive in more-developed markets’. [19]

b. Strong Economic Growth in Africa
The world is looking at Africa and becoming increasingly interested in investing in the continent partly because of Africa’s robust GDP growth rates and, ‘considerable resilience to financial shock’. [20] Africa grew at an estimated growth of 4.0% in 2013 and is expected to grow at 4.7% in 2014. [21] This is compared to 2.5% for the USA, 1.5% for Western Europe, 3% for Brazil and 2.9% for Russia. [22] These figures strengthen investors’ appetites for African offerings.

Image

c. Improved Availability Of Credit Information
The number of African countries rated by either Moody’s, Fitch or Standard & Poor’s increased to 21 from only 10 in 2003. [23], [24] Credit ratings are important for African governments as they make it easier to sell the country and related offerings due to several effects : [25], [26]

– Signal effect – increased credibility
– Information effect – especially for smaller countries that might otherwise be overlooked
– Advertising effect- the rating works as a kind of advert to investors, showing that the country is open to foreign capital
– Identifying country risk
– Economic policy effect – countries don’t want to lose ratings, and will adjust economic policy accordingly.

All these work together to foster confidence in investors, raising their inclination to favourably respond to African bond issues.

d. Africa’s limited exposure to international capital markets
Most of sub- Saharan Africa is not well exposed to international capital markets, providing ample opportunity for investors to make deals on the continent through instruments like international sovereign bonds that carry relatively low risk. Indeed, Moody’s predicts, ‘significant potential in Africa for increasing the use of international capital markets’. [27] There are possibilities for healthy profits to be made by increasing African exposure to capital markets and foreign investors are aware of this (risks notwithstanding).

So it looks like it’s smiles all around for African international sovereign bond issues…but behind the shine, does real danger lurk? Find out in the next post.

 Sources

[1] Gachiri, John (2014), ‘Eurobond attracts Sh702bn bids, shows investor confidence in Kenya’, http://www.businessdailyafrica.com/Eurobond-attracts-Sh702bn-bids-investor-confidence-in-Kenya/-/539546/2352268/-/14p1riw/-/index.html

[2]Willem te Velde, Dirk (2014), ‘ Sovereign bonds in sub-Saharan Africa: Good for growth or ahead of time?’, ODI http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8883.pdf

[3]Deutsche Bank (2013), ‘Capital markets in Sub-Saharan Africa, http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000321468/Capital+markets+in+Sub-Saharan+Africa.pdf

[4]Amadou N.R. Sy (2013), ‘First Borrow’, IMF, http://www.imf.org/external/pubs/ft/fandd/2013/06/sy.htm

[5] Amadou N.R. Sy (2013), ‘First Borrow’, IMF, http://www.imf.org/external/pubs/ft/fandd/2013/06/sy.htm

[6]Udaibir S. Das, Michael G. Papaioannou and Christoph Trebesch (2012), ‘Restructuring Sovereign Debt: Lessons from Recent History’, http://www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ch19.pdf

[7]Gachiri, John (2014), ‘Eurobond attracts Sh702bn bids, shows investor confidence in Kenya’, Business Daily, http://www.businessdailyafrica.com/Eurobond-attracts-Sh702bn-bids-investor-confidence-in-Kenya/-/539546/2352268/-/14p1riw/-/index.html

[8] IMF (2013), ‘Regional Economic Outlook: Sub-Saharan Africa Building Momentum in a Multi-Speed World’, http://www.imf.org/external/pubs/ft/reo/2013/afr/eng/sreo0513.pdf

[9] Udaibir S. Das, Michael G. Papaioannou and Magdalena Polan (2008), ‘Strategic Considerations for First-Time

Sovereign Bond Issuers’, IMF, http://www.imf.org/external/pubs/ft/wp/2008/wp08261.pdf

[10]Udaibir S. Das, Michael G. Papaioannou and Magdalena Polan (2008), ‘Strategic Considerations for First-Time

Sovereign Bond Issuers’, IMF, http://www.imf.org/external/pubs/ft/wp/2008/wp08261.pdf

[11] Sambira, Jocelyne( 2014), ‘ Hunting for Eurobonds’, http://www.un.org/africarenewal/magazine/april-2014/hunting-eurobonds#sthash.FyAGjNqr.dpuf

[12] Mark Roland Thomas (2012), ‘African Debt since Debt Relief: How Clean is the Slate?’, World Bank, http://blogs.worldbank.org/africacan/african-debt-since-debt-relief-how-clean-is-the-slate

[13] Amadou N.R. Sy (2013), ‘First Borrow’, IMF, http://www.imf.org/external/pubs/ft/fandd/2013/06/sy.htm

[14]Deutsche Bank (2013), ‘Capital markets in Sub-Saharan Africa, http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000321468/Capital+markets+in+Sub-Saharan+Africa.pdf

[15]Amadou N.R. Sy (2013), ‘First Borrow’, IMF, http://www.imf.org/external/pubs/ft/fandd/2013/06/sy.htm

[16] IMF (2013), ‘Regional Economic Outlook: Sub-Saharan Africa Building Momentum in a Multi-Speed World’, http://www.imf.org/external/pubs/ft/reo/2013/afr/eng/sreo0513.pdf

[17] IMF (2013), ‘Regional Economic Outlook: Sub-Saharan Africa Building Momentum in a Multi-Speed World’, http://www.imf.org/external/pubs/ft/reo/2013/afr/eng/sreo0513.pdf

[18] Udaibir S. Das, Michael G. Papaioannou and Magdalena Polan (2008), ‘Strategic Considerations for First-Time

Sovereign Bond Issuers’, IMF, http://www.imf.org/external/pubs/ft/wp/2008/wp08261.pdf

[19]Sarka Halas (2013), ‘Hunt for Higher Bond Yields Leads to Africa’, Wall Street Journal, http://online.wsj.com/news/articles/SB10001424127887323646604578402033262468070

[20] Javier Blas (2013), ‘Africa bond issues soar to record sums’, Financial Times, http://www.ft.com/cms/s/0/7f11fab8-2f61-11e3-ae87-00144feab7de.html#axzz35ATQX9Pu

[21] UN Department for Economic and Social Affairs (2013), ‘World Economic Situation and Prospects 2014: Global economic outlook’, http://www.un.org/en/development/desa/publications/wesp2014-firstchapter.html

[22] UN Department for Economic and Social Affairs (2013), ‘World Economic Situation and Prospects 2014: Global economic outlook’, http://www.un.org/en/development/desa/publications/wesp2014-firstchapter.html

[23] Minto, Rob (2013), ‘What use is a credit rating? For Africa, it means FDI’, http://blogs.ft.com/beyond-brics/2013/02/28/what-use-is-a-credit-rating-for-africa-it-means-fdi/

[24]Deutsche Bank (2013), ‘Capital markets in Sub-Saharan Africa, http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000321468/Capital+markets+in+Sub-Saharan+Africa.pdf

[25] Minto, Rob (2013), ‘What use is a credit rating? For Africa, it means FDI’, Financial Times, http://blogs.ft.com/beyond-brics/2013/02/28/what-use-is-a-credit-rating-for-africa-it-means-fdi/

[26]Reuters (2013), Ratings more than a piece of paper for Africa’, http://blogs.reuters.com/globalinvesting/2013/02/28/ratings-more-than-a-piece-of-paper-for-africa/

[27] Javier Blas (2013), ‘Africa bond issues soar to record sums’, Financial Times, http://www.ft.com/cms/s/0/7f11fab8-2f61-11e3-ae87-00144feab7de.html#axzz35ATQX9Pu

 

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2 thoughts on “What’s With All The International Sovereign Bonds Being Issued By African Governments? (Part 1)

    Thekenyanbanker said:
    June 23, 2014 at 6:25 pm

    Reblogged this on Thekenyanbanker.

    […] my previous post I looked at 1) Why international sovereign bonds have become so attractive to African governments […]

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