1. Background

Africa’s appetite for foreign-denominated debt has increased in recent times with the latest issues in Q1’2020 being Gabon and Ghana. The increased affinity for foreign currency-denominated debt continues to be attributed to:

1. Financing of maturing debt obligations,
2. The need to finance heavy infrastructure projects,
3. Reduced financial aid to African countries by Western donor nations, and
4. Covering for budget deficit

This note analyses SSA’s Eurobond performance in Q1’2020 with the aim of painting a picture of the investor sentiments risk tolerance, and an outlook on yield performance for the year 2020. The analysis will be broken down as follows:

1. Background of Eurobonds in Sub Saharan Africa in Q1’2020,
2. Eurobond Performance in Sub-Saharan Africa,
3. Outlook on SSA Eurobonds.

Section I. Background of Eurobonds Issued in Sub Saharan Africa

1. Analysis of New Q1’2020 Issues:

Collectively, Q1’2020 saw the Sub-Saharan Region raise USD 4.0 bn through Eurobond issues. The new instruments attracted a lot of interest as evidenced by the oversubscription in all the issues, with the Ghana issues recording the highest oversubscription of over 4.7x. This underlines the demand by premium investors to hold riskier assets, partly because, by comparison, African sovereign debt offers the highest yields to investors globally. African Eurobond issuers possess different risk characteristics depending on the issuer and the tenor of the bonds. Such risks include political, economic and therefore credit risks. The table below summarizes the Eurobonds issued in Q1’2020:

Below are the key take outs form the issues:

1. Gabon

Gabon issued Africa’s maiden Eurobond in 2020, a USD 1.0 bn, 11-year instrument, with a 6.6% coupon rate. The issue received bids worth USD 3.5 bn translating to a 3.5x subscription rate. The bond was earmarked for financing the country’s efforts in diversifying its exports by venturing into logging and agriculture to reduce the country’s over dependence on the world demand for Manganese and Oil, and hence reduce exposure to the impact of fluctuating crude oil prices. The Oil sector has accounted for 80.0% of its exports, 60.0% of its fiscal revenue and 45.0% of its GDP over the past 5 years, however Gabon has been facing a decline in its oil reserves in addition to the recent price wars that have caused oil prices to plummet. Gabon, which had a 60.7% debt to GDP ratio in 2018, was as of 4^th March 2020 downgraded by Fitch Ratings to CCC from B, in its Long-Term Foreign-Currency Issuer Default Rating (IDR). This was to reflect the fact that risks to the sovereign debt repayment capacity have risen significantly due to liquidity pressures from the fall in oil prices. According to Reuters Gabon has an additional USD 35.0 mn in external debt that is expected to mature this year, USD 736.0 mn in 2024 and USD 700 mn in 2025.

2. Ghana

Ghana issued Sub Saharan Africa’s longest-ever selling amortized Eurobond, a USD 750 mn tranche that with an average effective tenor of 40 years, offering an 8.9% coupon. Additionally, the country also issued a 15-year and 7-year Eurobond with 7.9% and 6.4% coupons respectively, raising 1.0 bn and 1.25 bn for the 15-year and 7-year Eurobonds, respectively. The entire issue raised USD 3.0 bn, with bids received totaling to USD 14.0 bn translating to a 4.7x oversubscription. The Eurobonds are to be used to restructure the country’s obligations to independent power producers since the country was in talks to re-negotiate the supply deals from the current take-or-pay agreement that means that the government is billed even for unused electricity, to retire more expensive debt and hence reduce the interest costs, as well as to fund infrastructure projects. Ghana had a 60.0% debt to GDP ratio in 2019 with Moody’s changing its outlook from positive to stable, while affirming the B3 rating balances, in January 2020, reflecting its raising confidence that the country’s institutions and policy setting will foster improved macroeconomic and fiscal stability over the medium term. According to Reuters, Ghana, which also issued three Eurobonds valued at USD 3 bn in 2019, has USD 22.4 bn in outstanding debt as at 31^st March 2020.

2. Analysis of Existing Issues

Yields on all African Eurobonds increased in Q1’2020 after a decline in 2019. This was attributable to the COVID-19 health crisis, with investors attaching a higher risk premium on the affected regions due to the anticipation of slower economic growth. This section analyses some of the Eurobonds issued in Sub Saharan Africa before Q1’2020.

From the table above,

1. Yields on all Sub-Saharan Eurobonds increased in Q1’2019 attributable to the ongoing Coronavirus pandemic and the uncertainties involving the impact that it will have on the economy, with investors attaching a higher risk premium on developing countries, and,
2. Zambia recorded the highest increases in Eurobond yields, with the 10-year instruments for both the 2012 and 2014 issues increasing by 30.5% and 19.1% points respectively, while the yield on the 12-year bond issued in 2015 increased by 15.2% points. This makes Zambian Eurobonds the worst performing in Sub Saharan Africa, due to concerns of a widening fiscal deficit and deteriorating credit worthiness on the back of high debt levels. Zambia’s increasing debt levels estimated at 74.4% of GDP ratio, coupled with the 22.3% depreciation of the Kwacha year-to-31^st March presents the risk of rising debt-service costs for the economy, hence necessitating demands for higher premium on sovereign debt issued by the country.

The increasing yields have further been affected by appreciation of most of the local currencies of the respective nations. Below is a summary of the performance of the different resident currencies for Q1’2020:

The depreciation of local currencies has the effect of making dollar denominated debt more expensive, hence increasing the danger of rising debt-service costs.

Section III: Outlook on SSA Eurobonds

From the analysis, it is evident that Eurobond yields in Sub Saharan Africa increased in Q1’2020, attributable to the COVID-19 health crisis, with investors attaching a higher risk premium on the affected regions due to the anticipation of slower economic growth. Notably, African debt has been on the rise mainly due to a slowdown in commodity prices, which has affected revenue generation as most African countries are commodity driven. To plug in the budget deficit most countries have been forced to dip in the international fixed income market to raise funds to fund their budget deficits as well as refinance existing debt obligations. The deficit has also been widened by expensive infrastructure investment promises made by the elected governments and the rapid economic growth in non-Paris club members, the Paris club being an informal group of creditor nations whose objective is to find workable solutions to payment problems faced by debtor nations.  Cote d’ivoire, Benin, South Africa and Nigeria that planned to issue Eurobonds this year are likely to postpone the debt issues given the Coronavirus pandemic that is causing investors to pull money out of the international bond market, as they try to minimize the risk on their portfolios. The Eurobond window for Sub-Saharan Africa is effectively closed for now given the strong drop in commodity prices that has led to the region underperforming emerging market peers, and also because investors have a current preference for safe havens. There are a few points to note:

1. Public debt- Sub-Saharan Africa’s public debt had increased by half from 40.0% to about 59% of the GDP in 2018, making it the fastest growing debt accumulation region far beyond the other developing regions. 18 countries in Sub-Saharan Africa were in debt distress, or at a high risk of debt distress, according to the IMF as at 31^st August 2019, under the joint World Bank/ International Monetary Fund, Debt Sustainability framework, Debt distress meaning that the country is already having repayment difficulties for example Chad and Mozambique. High risk of debt distress being a baseline scenario that indicates a protracted breach of debt or debt service thresholds, but the country has not yet defaulted, countries in this category include The republic of Congo and Zambia to mention a few. The spread of Coronavirus coupled with the plummeting oil and commodity prices is likely to increase the number of countries in debt distress with many governments now facing the decision on whether to satisfy creditors or spend money on hospitals and on bailing out the economy, a situation that may lead to an increase in defaults, and
2. Subdued Economic Growth- Sub-Saharan Africa is set for its first recession in 25 years, with the World Bank projecting its economic growth at (2.1%)-(5.1%) from a growth of 2.4% recorded in 2019. The World Bank is estimating that the deadly COVID-19 pandemic could cost the region about USD 37.0 bn -79.0 bn in terms of output losses caused by trade disruption. Due to the deteriorating fiscal positions and increased public debt, governments in the region do not have much wriggle in deploying fiscal policy to address the Coronavirus crisis. So far to address this, the Word bank has called on China, the United States and other bilateral creditors to temporarily suspend debt repayments by the poorer countries so that they can focus their resources oh halting the spread of the disease.