African na­tions turn to bond mar­kets for fi­nance needs

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY FT COR­RE­SPON­DENT

When Ghana be­came the first west African na­tion to en­ter the in­ter­na­tional bond mar­kets a decade ago, it was part of a flurry of deb­trais­ing in the world’s least de­vel­oped re­gion.

When Ghana be­came the first west African na­tion to en­ter the in­ter­na­tional bond mar­kets a decade ago, it was part of a flurry of debt-rais­ing in the world’s least de­vel­oped re­gion.

Now the bills are com­ing due, with nearly $25bn of sov­er­eign debt set to ma­ture in the re­gion next year ac­cord­ing to an FT anal­y­sis of Thom­son Reuters data.

In­vestors’ rush into emerg­ing market debt since the start of this year should be a boon for African fi­nance min­is­ters seek­ing to re­fi­nance — sub-Sa­ha­ran coun­try debt with a to­tal re­turn of 10.9 per cent has out­per­formed the EM av­er­age of 9.1 per cent so far this year, ac­cord­ing to Bloomberg data.

But the big ques­tion for in­vestors and fi­nance min­is­ters is whether the cur­rent bullish market con­di­tions will hold for the com­ing wave of new debt sales.

Since the start of this year sub-Sa­ha­ran African debt has “put in a stel­lar performance”, says Sergey Der­gachev, se­nior port­fo­lio man­ager at Union In­vest­ments. “The ques­tion is whether this [rush for yield] is fun­da­men­tally jus­ti­fied.”

A cause for con­cern is that the re­gion’s econ­omy is still frag­ile, feel­ing the reper­cus­sions of the mid-decade slump in oil and com­mod­ity prices. Be­yond the strik­ing price performance in re­gional bonds so far this year, con­cerns over high debt lev­els and credit risk res­onate.

Credit rat­ing agency Moody’s has seven of the 19 sub-Sa­ha­ran African sov­er­eigns that it rates on neg­a­tive watch — the high­est pro­por­tion of any world re­gion — and has down­graded four coun­tries since the start of the year.

“De­spite the im­prov­ing global macroe­co­nomic en­vi­ron­ment, it is still fair to say that the risks in sub-Sa­ha­ran Africa are to the down­side — not for all sov­er­eigns but in par­tic­u­lar for those which are no­tably de­pen­dent on com­modi­ties prices,” says Lu­cie Villa, a se­nior an­a­lyst at Moody’s who spe­cialises in the re­gion.

The level of risk is “un­evenly spread across the re­gion”, she says. “There are coun­tries that have cer­tainly ben­e­fit­ted from the global macro out­look im­prov­ing, but low com­modi­ties prices are caus­ing a drag on the eco­nomic and fis­cal out­look for some.”

Two coun­tries -— Mozam­bique and Re­pub­lic of the Congo — have de­faulted on debt this year. The lat­ter was the re­sult of a pay­ment to in­vestors be­ing blocked by a US court, whereas Mozam­bique faces a more fun­da­men­tal strug­gle with ex­ces­sive in­debt­ed­ness af­ter a mis­ap­pro­pri­a­tion scan­dal.

Gra­ham Stock, head of emerg­ing mar­kets sov­er­eign re­search at BlueBay As­set Man­age­ment says that while the gen­eral macro out­look for the re­gion is pos­i­tive, in­vestors are fail­ing to do their credit home­work.

“We are wary of smaller economies where dol­lar-de­nom­i­nated debt is a big bur­den for the bud­get, [where] I don’t think the pric­ing re­flects enough re­ward.”

This is be­cause yields have been fall­ing since the start of the year as in­vestors pile in, some of whom have not fully ap­pre­ci­ated the risk they are tak­ing on, he ar­gues: “We have seen yields mov­ing lower and some of that is be­cause of in­dis­crim­i­nate al­lo­ca­tion by ETFs, and also the grab for yield in emerg­ing mar­kets glob­ally. This makes it all the more im­por­tant to dif­fer­en­ti­ate.”

Past ex­pe­ri­ence has proved that in small, thinly traded mar­kets, a rosy mood can quickly turn sour and then op­por­tu­ni­ties for in­vestors to sell out be­come lim­ited, Mr Stock warns: “In 2008 and dur­ing the ta­per tantrum in 2013 there just wasn’t an exit door for in­vestors who had not done their fun­da­men­tal anal­y­sis.”

Mr Der­gachev echoes his con­cerns: Credit risk is “quite per­sis­tent — look at what hap­pened with the Mozam­bique de­fault, and the Congo miss­ing a pay­ment” — so po­ten­tial in­vestors eye­ing sub-Sa­ha­ran African yields “have to bear in mind that Africa is not a risk-free as­set”. Per­haps some have for­got­ten this, he sug­gests: “In­vestors should dif­fer­en­ti­ate be­tween cred­its a lot, but the market is not dif­fer­en­ti­at­ing at the mo­ment.”

Mr Der­gachev is pos­i­tive about Rwanda, Ethiopia, Ghana and Zam­bia, and neg­a­tive on Mozam­bique, Gabon and An­gola. Mr Stock is keen on Nige­ria, Cote d’Ivoire and Kenya, and wary of Mozam­bique, Ethiopia and An­gola.

Ms Villa sug­gests that warn­ing signs in­vestors should watch for across the con­ti­nent when con­tem­plat­ing buy­ing into a sov­er­eign bond are poor in­fra­struc­ture, which poses a struc­tural im­ped­i­ment to eco­nomic growth, along with “par­tic­u­larly low in­sti­tu­tional strength and large ex­ter­nal for­eign­cur­rency debt”.

“For those sov­er­eigns, the credit risk or stress is to some ex­tent independent of how quickly the econ­omy is grow­ing,” she says. “If you have a very high stock of debt to pay, or large deficits to fi­nance, your growth rate is not go­ing to help you that much.”

With a sub­stan­tial pro­por­tion of that debt stock set to ma­ture in the com­ing years, the mar­kets’ ap­petite for some of the riski­est sov­er­eign debt on the planet is set to be tested.

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