Are African investors getting ahead of themselves?

Africa’s Eurobond market has blossomed in the past two years. Several countries have issued for the first time and demand has been so strong that sub-Saharan sovereign dollar deals returned almost 30% last year.

Few analysts expect the market to cool anytime soon, not least because the continent’s debt levels remain low and its growth is forecast to be well above the global average for the next few years.

Yet even some African bulls were taken aback by the enthusiasm with which investors greeted the news that Rwanda would print a debut international bond. (A roadshow was held in April and a deal was expected at the time The Banker went to press.)

The east African country bears little resemblance to others from the continent that have tapped the market so far. For a start, it is tiny and very poor. Its gross domestic product (GDP) last year was $7bn and its GDP per capita was less than $700. And, crucially for a sovereign looking to issue debt in a foreign currency, it has foreign exchange reserves of just $900m, which is largely a result of it having almost no exports.

Another factor is that Rwanda’s relations with donors, whose money accounts for 40% of the budget, have deteriorated since last year when the country was accused by the UN of supporting militants in neighbouring Democratic Republic of Congo. Small amounts of aid have already been cut. Should even more be held back, its impressive growth rates of recent years could slow significantly.

Yet rather than focusing on these issues, investors during the roadshow seemed more concerned about persuading Rwanda, which was looking at $400m, to sell a $500m deal, thus making it eligible for emerging-market tracking funds. Moreover, the yield looked set to be determined by little more than adding a slight premium to the outstanding bonds of Ghana, Zambia and Senegal, even though they are all far bigger economies.

International capital markets can play a big role in Africa’s development, not least allowing countries to diversify from donor funding. But investors should be careful to differentiate thoroughly between issuers. Rwanda is no Ghana, let alone a Nigeria. While there is little reason for it not to be able to issue a Eurobond, the pricing and size of the deal should properly reflect its economic position. If not, investors could find themselves getting badly burnt.