Sub-Saharan Africa (SSA) economies in 2018 tapped more into the Eurobond market, increasing by 77 percent the amount they raised from offshore sources as they sought to access cheaper funds to meet domestic needs, United Capital Research says.
The countries raised $18.6 billion last year, from $10.5 billion they issued in 2017, United Capital, a leading African financial and investment services company in Nigeria, said in a 2019 outlook report released recently.
BusinessDay analysis of the report shows that in the first quarter of 2018, four SSA countries (Nigeria, Kenya, Senegal and Ivory Coast) issued $5.5 billion and €3.3 billion worth of Eurobonds while Angola, Ghana, and South Africa followed suit in the second quarter by issuing $7.5 billion worth of Eurobond.
A Eurobond is a special type of bond that is issued in a currency other than the issuer-country’s home currency. Since it is issued in a foreign currency and its target investors are foreigners, it is considered one way that a country can raise foreign pubic debt.
SSA countries are faced with financing challenges including need to fund infrastructural gaps, but domestic high interest costs are pushing the governments to look outwards to tap into lower-cost funds. This has led to rising exposure by these countries to the financial markets of the developed economies. But analysts warn that with rising interest rates in the mature markets, the attractiveness of these markets may begin to wane for the SSA countries.
This trend is being driven by the higher-yield environment within the SSA region relative to yields in the development markets, says Ayodeji Ebo, MD, Afrinvest Securities Limited said. Consequently, he said, “The SSA countries reduce domestic borrowings,” citing the example of Nigeria, which raised more external debt in 2018 than in 2017.
The report said however that primary market activities were largely muted in the third quarter amid rising rates in the developed markets with only Nigeria issuing another $2.9 billion in the last quarter albeit at a more expensive rate.
In 2017, Nigeria, South Africa, Senegal, Ivory Coast and Gabon issued $4.7billion, $2.5 billion, $1.1 billion, $2 billion, $0.2 billion worth of Eurobond, respectively, while Angola, Ghana and Kenya issued none.
According to Cytonn report by the Cytonn Investments team that that provides reliable market insights for investors interested in the high-growth East Africa region, SSA seems to have positioned itself as an attractive investment destination as seen by the improving macroeconomic conditions.
GDP growth in SSA is projected to come in at 3.4 percent in 2018, up from 2.8 percent in 2017, supported by higher commodity prices, and improved capital markets access, according to the Regional Economic Outlook report by the International Monetary Fund dated April 2018.
“In the earlier part of the year 2018 the international bond market was cheap and it provided opportunities for companies and governments to access the international bond markets at a point where yields were low. Yields were low and were attractive for those who wanted to go long,” Johnson Chukwu, CEO, Cowry Asset Management Limited said to BusinessDay in a telephone interview.
But Gbolahan Ologunro, an equity research analyst at Lagos-based CSL Stockbrokers, said that the interest of other countries or investors on SSA Eurobonds was on the backdrop of the nominalisation of monetary policy of United States of America.
“What investors are trying to do is to take advantage of the relatively attractive rates on international loans, given the fact that the United States of America will still continue to hike interest rate which means higher rate of borrowing in the international market,” Ologunro said.
Ologunro further said that it was more or less a proactive move to just take advantage of relatively high borrowing since the federal reserves hiked its rate about four times in 2018.
But in 2019, there are growing expectations that the U.S. Federal Reserve will either pause or halt its interest rate hike cycle, with the euro and Swiss franc leading in gains among their rivals.
On the outlook for SSA’s sovereign Eurobonds issuance in 2019, the United Capital report stated that it may likely remain bearish.
“With an outlook for tighter monetary conditions in advanced economies, however, we believe the growing track record of consistent coupon payments and capital repayments will send a positive signal to investors while the need to raise capital to fund rising fiscal deficit might spur another round of Eurobond issuance,” it stated.
