African Eurobonds: three themes from Q2:2018
Record issuance in 2018.
Despite talk about the debut issuance from the continent in 2012-14, the recent wave of issuance has been larger. A huge African Eurobond issuance in Q1:2018 continued in Q2:2018. By the end of May, the year 2018 became a record year with USD21.8billion in dollar bonds issued, compared with USD19.4 billion in 2017. In April and May 2018: Egypt, Angola, South Africa and Ghana all issued Eurobonds. There was no issuance in June as market sentiment deteriorated further (and most African countries had already realised their issuance plans for the year).
Nonetheless, African issued Eurobonds remain a small part of the frontier and Emerging Market - EM bond space. For example, in April 2018, Saudi Arabia and Qatar issued dollar bonds with a combined total of USD23billion.
Eurobond pricing for African nations hit hard.
A stronger United States dollar (rallying from mid-April to end of June) and higher returns on US bonds (the 10-year breached the 3% level in May, 2018) reduced appetite for investing in emerging markets. Added to this, were worries about USA- China trade relations. This resulted in outflows from emerging market funds and downward pressure on bond prices, including African countries’ Eurobonds.
Outflows, also prompted investors to reassess risks. Dollar bonds performed worse where markets perceived vulnerabilities to be largest (for example in Turkey, Argentina and Zambia). Bond indexes compiled by JP Morgan (that track bond performance across emerging markets) declined during the first half of 2018. Their emerging market hard currency bond index lost 4.1%. All African Eurobonds ( issued prior to the start of the year) decreased in price in H1:2018.
Longer-dated Eurobonds.
The themes of Q1 –including longer dated bonds and issuance in Euros—continued in Q2. Each of the Q2 issuers came to the markets with a two-tranche issue: Egypt (EUR2billion; split between 8yr and 12yr paper); Angola (USD3billion; 10yr and 30yr), Ghana (USD2billion; 11yr and 31yr), and South Africa (USD2billion; 12yr and 30yr). In 2012 when the African Eurobond story gained momentum, it was thought that African countries with lower credit ratings could not issue Eurobonds over 10yrs in length. Ghana paved the way with a 15yr bond in 2015 (with a World Bank guarantee) and then Nigeria cemented the idea with 15yr and 30yr Eurobonds in 2017. This myth has been truly broken in 2018.
Longer maturities are vital for the issuing countries. Ten (10) years is often not long enough for an economy to grow sufficiently and repay the debt, especially if economic expansion is interrupted by an external shock (for example a reduction in commodity prices). Over 15-30 years it is more likely investment associated with the borrowing will enhance GDP growth.
Country highlights
Egypt came back to the markets for a second time with a USD4billion issue in February. In April, 2018 they issued EUR2billion (8yr and 12yr paper) and have issued 29% of the African total issuances so far this year.
Angola priced USD3billion on 9th May 2018 as the markets got weaker, but they were able to issue 10yr and 30yr paper. These bonds have performed better than other Eurobonds issued in 2018 on the back of higher oil prices and a positive narrative about reform and combating corruption.
Ghana had plans to issue in Q1 but waited until they had secured a positive review of their IMF program at the end of April. Ghanaian officials were on their roadshow in a tough week for emerging markets. Luckily for Ghana, the market deterioration took a brief pause on the day they priced their Eurobonds. Despite the market turmoil they got a reasonable deal with a coupon of 7.63% on their 2029 including on some long-dated paper such as the 2049 that earned the investor 8.63%. Their recent story of reform and economic growth helped them access this financing after a period of more expensive borrowing in 2015 and 2016.
South Africa came to the markets for USD2billion (12yr and 30yr paper), raising the stock of their outstanding Eurobonds to USD19billion, approximately 24% of outstanding sovereign Eurobonds from the continent.
Zambia has seen very little change to its economic fundamentals in 2018, but their Eurobonds have been hit hardest. The risks of no IMF support should have been priced-in from July 2017 (when it became clearer that an IMF program would not be signed). Instead the prices of their bonds increased in 2017 as emerging market bond funds recorded inflows. It took the EM wobble from April 2018 to un-nerve investors and dramatic re-pricing followed. Zambia’s key risks are insufficient foreign exchange reserves to buffer an economic shock and the Zambian government’s complacency about its rapid debt accumulation.