African markets to watch
WILL REWARDS CONTINUE: 2020 MAY PRESENT A NEW SET OF RISKS
African bonds could remain in hot demand if major central banks stay dovish in new year.
Global bond traders who ventured into Africa this year have reaped rich rewards. The continent’s sovereign dollar debt has generated total returns of 20% since the start of 2019, more than any other region in emerging markets.
Local bonds have also performed strongly. Egyptian pound and Nigerian naira bonds each returned more than 30% in dollar terms.
If the world’s major central banks remain dovish in 2020, that should sustain a dash for higher yields in emerging markets and mean that African bonds remain in hot demand.
Africa is a “land of opportunity” and could be one of the main beneficiaries if the US and China make more progress on trade talks, said Bank of America strategists including London-based David Hauner.
But investors face plenty of potential risks in 2020. South Africa could lose its last investment-grade rating, Ghana’s government might ramp up spending ahead of elections, Zambia’s debt crisis could spiral out of control and Nigeria may be forced to devalue its currency. Here’s what to watch for in four key markets:
Ghana
West Africa’s second-biggest economy holds general elections in late 2020, with President Nana Akufo-Addo probably seeking a second term. The country has a history of fiscal profligacy in the run-up to polls and investors will watch whether the government is more cautious this time. The cedi has been under pressure. But Renaissance Capital, which recommends that clients buy Ghana’s Eurobonds, said it was now one of Africa’s most undervalued currencies.
Nigeria
Nigeria’s status as one of the world’s best carry trades will probably last as long as central bank Governor Godwin Emefiele keeps the naira stable.
That’s becoming harder, with Nigerian foreign reserves having dropped 14% to $39 billion (about R552 billion) since July. Emefiele’s signalled he’ll let them fall a lot further before loosening his grip on the currency, which barely budges. Fiscal authorities, meanwhile, will try to boost an economy that’s been growing more slowly than the population for the past five years.
South Africa
Portfolio investors have exited South Africa en masse this year, pulling a net $10 billion (about R141 billion) from its stock and local-bond markets, according to data from the Johannesburg Stock Exchange.
They’ve been concerned by the deepening crisis at Eskom, which can’t service its $30 billion (about R425 billion) of debts without government support, and the increasing chance that Moody’s Investors Service will cut South Africa’s final investment-grade rating to junk. But if President Cyril Ramaphosa makes headway in reforming Eskom, investors will probably be quick to come back. Bank of America and Goldman Sachs Group both said its inflation-adjusted bond yields were attractive and the central bank had room to cut interest rates.
Zambia
Zambia’s economy has worsened this year, the latest problems being severe drought and electricity outages. The copper producer’s dollar-bond yields trade at almost 20%, suggesting investors see a high risk of default. The government still has some time on its hands – its next Eurobonds don’t mature until September 2022.
But analysts believe it will struggle to avoid a restructuring unless it quickly gets debt relief on loans from China and a bailout from the International Monetary Fund. President Edgar Lungu has so far seemed reluctant to accept the conditions that would come with a loan from the lender. – Bloomberg