Eurobond issuance from sub-Saharan Africa is still dwarfed by that from elsewhere in the world. But more and more African sovereigns are tapping the market as investors clamour for exposure to the rapidly growing region, where local bond markets are also developing quickly.

Holders of emerging market debt have had it good in the past 12 months. With yields in the developed world so low, fixed-income investors have rushed to buy bonds from other parts of the globe.

Yet even within the emerging market class, sub-Saharan African Eurobonds managed to stand out, returning close to 30% last year (compared to about 19% for emerging market Eurobonds overall). There was scarcely a deal that failed to perform well. Senegal’s only international bond rose 32% in 2012, while one from the Seychelles made gains of 29%. Côte d’Ivoire’s $2.3bn deal, which went into default in late 2010 but saw demand rise last year following the government announcing plans to pay off the arrears, returned a massive 91%, making it probably the best performing sovereign Eurobond in the world. And a debut $750m deal in September from Zambia, a copper exporter rated B+ by Standard & Poor’s and Fitch, raised a $12bn orderbook.

“The demand for African assets has been phenomenal,” says Florian von Hartig, global head of debt capital markets at Standard Bank.

While African issuers have undoubtedly benefited from low interest rates in the developed areas of the world, particularly the US, they have also attracted investors because of their strong macroeconomic performance in recent years. Economic growth in sub-Saharan Africa is forecast by the International Monetary Fund (IMF) to be 5.7% in 2013. And most governments, thanks in part to debt relief over the past decade, have strong fiscal positions, with low debt-to-gross domestic product (GDP) ratios. That of Nigeria, Africa’s second biggest economy after South Africa, is less than 20%.

Mali the exception

Political stability has been crucial, too. While events in Mali have highlighted ongoing security problems in some countries, many investors believe that such cases of unrest are increasingly becoming the exception in sub-Saharan Africa. “Investors feel they probably exaggerated political risk in Africa in the past,” says Peter Sullivan, head of public sector, Africa, at Citi. “There’s been tremendous political stability in many key African countries and a maturing of institutions in the past decade.”

Despite Africa’s popularity, its issuers are still scarce in the bond markets. Of the sub-Saharan region’s 49 countries, only 11 have public international bonds outstanding (and only one of those, South Africa, has more than one deal in the market). “If you look at emerging market sovereign issuance in the past five or six years, Africa represents less than 5% of that total,” says Mr Sullivan.

In recent years, supply has picked up, albeit slowly. Nigeria and Namibia tapped the market for the first time in 2011, while Angola sold $1bn of debt with a quasi-Eurobond structure last August, shortly before Zambia’s maiden Eurobond.

While few bankers believe issuance will be much greater in 2013, several countries are rumoured to be or have publicly said they are looking to print debut deals. Among them are Kenya, Tanzania, Mozambique and Rwanda (although the latter’s plans look to have been put on hold following aid cuts late last year and fears these could slow its recent rapid economic growth). Nigeria is likely to tap the market for a second time in the next 12 months, while Ghana could look to refinance its $750m note from 2007 with another Eurobond.

Debt bankers say African governments should bear in mind that the continent’s Eurobond yields are at, or very close to, their lowest ever levels. “US dollar interest rates are at all-time lows and there’s plenty of liquidity around,” says Mr von Hartig. “I doubt that any sovereign issuing today would look back in three years and have any reason to be upset. So I’d like to see more African sovereigns take advantage of this environment.”

Moreover, concessional funding from donors and multilateral institutions is being tightened amid austerity drives in the West. And when it is available – from, say, Chinese state-owned banks, which have provided Africa with billions of dollars of concessionary loans in the past five years – bankers say the pricing is no longer far cheaper than on Eurobonds. “Sovereign Eurobonds are now competing in terms of price with loans from China,” says Mr von Hartig. “If you take the Zambia deal [a 10-year note sold with a 5.625% yield], it was probably tighter than what could have been achieved with a Chinese private placement.”

Scarce corporate borrowers

Africa’s corporate borrowers, especially those from outside South Africa or the Nigerian banking sector, rarely tap international bond markets. Local currency issuance from them is similarly low. A recent IMF study stated that Africa’s corporate bond market capitalisation amounted to just 1.8% of GDP in 2010. In South Korea the figure was 60%, and in China it was 23%.

Plenty of reasons are behind this, including a lack of liquidity in sub-Saharan capital markets and over-bearing regulations that deter borrowers. High interest rates are also a problem in many countries. A year ago, the Nigerian government was funding in naira at 16%. Analysts say that corporate borrowers would thus have had to pay close to 20% to issue bonds, which all but a few were willing to countenance. “High nominal interest rates are a major impediment to the growth of Africa’s corporate bond markets,” says Jingdong Hua, treasurer at the International Finance Corp (IFC), the World Bank’s private sector-lending arm. “It’s something policy-makers have to be very aware of. When you look at east Asia, when nominal interest rates are in single digits, that’s when corporate bond markets [pick up].”

Bond Market Capitalisation Comparison 2010

To help spur the development of local currency corporate bond markets, the IFC launched a pan-African bond programme in 2012. Through this it will seek to issue deals in several different countries and work with regulators in those to ensure they have the correct policies and technology to build their markets. Its initial focus was on Botswana, Ghana, Kenya, South Africa, Uganda and Zambia. But it has already broadened its scope and recently got approval to issue in Rwandan francs. “If we can be the catalyst and work with governments to ensure that market infrastructure and regulatory frameworks are in place, we’ll encourage other players to come in,” says Mr Hua.

He adds that a naira-denominated bond sold by the IFC in early February, its first in the currency and which was twice oversubscribed, demonstrated that local investors want to diversify their holdings from sovereign debt – which dominates fixed-income markets almost everywhere in Africa. “Our experience in Nigeria really tells a story,” he says. “You have pent-up demand from domestic investors, not to mention international ones, for different asset classes. Right now their choices are limited [beyond government bonds].”

Local markets growing

International investors interested in Africa are increasingly buying its local currency debt. Exemplifying this, Ghana sold a 402m cedi ($209m) three-year bond in January – a month after it had held peaceful elections – that attracted 2.2bn cedis of orders, almost all of them from foreigners. South Africa, Nigeria and Kenya have also experienced heavy inflows from bond investors in the last 18 months.

Part of the development has been a result of governments opening up their bond markets to encourage more portfolio investment and bring down their funding costs. In 2011, Nigeria lifted a rule that required non-residents buying naira government bonds to hold them for at least a year, which led to a significant increase in demand from such investors. This openness was further rewarded in October 2012 when the country was added to JPMorgan’s widely tracked local currency government bond index for emerging markets.

Most of sub-Saharan Africa’s other big economies are also liberalising their bond markets, even if some restrictions remain (in Ghana non-residents cannot buy government securities with a maturity of less than three years). Examples such as Angola, which has strict capital account controls and where it is very difficult for foreigners to buy government debt, are becoming rarer. “Governments in general are seeing the benefits of having a wider market accessible to them,” says Belia Fofana, founder of Mikaty Capital, an advisory firm for governments and constructors wanting to raise finance for infrastructure projects. “Since the crisis, there have been a number of improvements in regulations allowing international investors in.”

The advantage to investors of buying local currency debt rather than Eurobonds is the yield it offers. Ghana’s cedi bond from January was issued with a 16.7% coupon, while at the same time the country’s $750m Eurobond maturing in 2017 was yielding just 4.2%.

Many portfolio investors that want exposure to Africa are still wary of local currency debt, given the exchange rate risk. African currencies remain volatile and often depreciate rapidly even when economic growth is strong, as was the case with Ghana’s cedi last year. “Even yields of 15% or more can be significantly eroded if there’s a big move in the currency,” says Graham Stock, chief strategist at Insparo Asset Management.

Still, it seems unlikely that demand for African fixed-income assets, whatever their denomination, will wane in the next few years. As the continent’s economic growth continues, investors will increasingly want exposure to it. “It is part of the natural process of financial integration,” says Mr Stock. “These are frontier markets, but there’s no reason to suppose they won’t enjoy the same evolution as other emerging markets have in the past few decades.”

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