Developments in the African debt capital markets

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

There has been a flurry of new African dollar debt issuances thus far this year. A bunch were for refinancing existing issues. They almost all were also used to fund budgets. Some infrastructure-led ones have also been done. With as much as $15 billion in dollar debt issued by African sovereigns in 2018 to end-March, the appetite for high-yielding but increasingly risky African credit remains high. Ivory Coast blazed a trail by issuing the largest ever euro-denominated bond by an African country in mid-March. The 2-tranche €1.7 billion bond yielded 5.25% for the first 12-year note and 6.625% for the second 30-year note; the first such long-tenored for an African sovereign issuer. And the spread of the interest despite increasingly difficult market conditions is evidence there is probably going to be as much money chasing as much African debt that there is. Take the Ivory Coast case, American and European investors dominated the list of subscribers. Insurance companies and pension funds took at least 70 percent of the notes with banks taking meagre portions. Broader ex-China Asian interest in African credit is about to be tested. Ghana, which plans to issue $2.5 billion in new foreign debt this year, is looking to Asia. In April, before the end of which it plans to issue a $1 billion eurobond, its officials met Japanese investors to gauge their interest for a potential yen-denominated bond. Zimbabwe plans to tap the eurobond market before end-2018. Before then, it has to clear about $1.8 billion in arrears owed the African Development Bank and World Bank; which it has committed to doing by September. As it did not have the funds, it went in search of bridge financing from global banks in April.

More than meets the eye
Lately, there has been concerns about transparency. A number of African countries may not have been truthful about their total indebtedness, it has been found. Of course, this raises questions about their advisers whose jobs it is to ensure that whatever records are published are the correct ones. Even so, the onus of disclosure is primarily on the issuer. While hitherto, investors were just happy to get a slice of these issuances, there is increasing circumspection. Not that the yields do not more than compensate for the risk. But surely, a high yield is no good to any investor if the corpus is lost. With African sovereigns now perceived to perhaps have more debt than they let on, Zambia and the Republic of Congo lately, investors are asking more questions. This adverse development coincides with just the time that more money from developed economies is likely headed back home as interest rates become more attractive over there. 10-year US treasury notes could breach the 3 percent mark by end-2018; they were already yielding 2.8 percent in April. The concerns oft-raised about the potentially dire implications of tighter capital markets for African issuers is somewhat exaggerated, though. With almost $240 trillion in global debt outstanding, the borrowing needs of the just over $2 trillion African economy is minuscule. The last time it was discovered an African sovereign, Mozambique, that is, had hidden debt, a default followed and investors suffered losses from what was a painful and still ongoing restructuring. Although Mozambique is making some headway with some of its foreign creditors, others have not been as accommodating. In March, its main foreign creditors rejected the restructuring plans it presented on about $2 billion of debt it owes them. One of the plans included as much as a 50 percent haircut on accrued interest payments of as much as $700 million. In any case, the IMF says Mozambique is not likely going to be able to fulfill its foreign debt obligations for another five years, having not made payments due on them since 2017. Thankfully, it agreed restructuring terms on the $2 billion owed China and $177 million to India in March. Concerns about Zambia’s true debt load were raised in mid-April. And even after Zambian authorities showed budget documents to prove it had nothing to hide, markets remained sceptical. There are also suspicions about the liabilities of the Republic of Congo. Now, market participants wonder if there might not be others.

Antsy markets
Markets have become antsy lately. Tensions are rising in the Middle East, America is fighting a trade war with China and perhaps any other country that irks President Donald Trump, the Fed is raising interest rates, and other global central banks have either started tightening their monetary policy like the Bank of England, or signalled the paring down of extraordinary bond purchases called quantitative easing (QE) that flooded markets with easy money hitherto. Amidst such sharp changes in global markets, this is hardly the time for African sovereigns to have peculiar encumbrances. The institutions raising doubts about the actual amount of foreign debt in the books of Zambia are credible. Bank of America Merril Lynch and Nomura International are top global investment banks. Investors are taking heed. Almost momentarily after the revelations in mid-April, yields on Zambia dollar bonds rose by more than it ever did in at least a year. It would probably be among the worst performers of African eurobonds this year if the authorities are not able to demonstrate and convince market participants they have been honest all along. What is the prospect of this, anyway? History suggests they would likely not be able to refute the claims. Investors have probably moved on anyway. More importantly, or perhaps adversely, is that the level of disclosure that would be required for future African dollar debt issuances would be unprecedented.

What are the facts? Bank of America claims Zambia’s external debt increased by at least $10 billion from 2015; potentially adding the equivalent of about 30 percent of GDP to the country’s debt load over a 5-year time horizon. The authorities’ rebuttal is that Zambia’s total foreign indebtedness was about $1.3 billion less than the incremental level suggested by the American bank as at the end of 2017; still over 40 percent of GDP. In cases such as these, much store is put in the IMF; which tends to be able to probe deeper than advisers. It has asked the respective countries to provide details of their total indebtedness; especially those to commercial banks and in the case of commodity exporters, swap arrangements and so on. What these latest revelations portend is that investors may begin to ask for more compensation for what they are likely to now see as riskier exposures. The repayment risk adds to still disproportionate perception of political risk of African sovereigns in international debt capital markets. This is probably needless. African sovereigns are more politically stable today than they were years ago. And recent elections in Kenya, Liberia, and Sierra Leone – to mention a few – which all went into second rounds, with the extreme Kenyan case almost at breaking point, proved to be not as disruptive as feared. And with commodity prices recovering, the finances of commodity-dependent African countries are beginning to improve. The fear, though, is that the resurgent commodity boom may not last for long.

Expensive tastes
Incidentally, despite the ramped-up foreign borrowing by African sovereigns, some of the projects the monies are supposedly aimed at are floundering. In April, it was revealed that Kenya, which raised $2 billion from the eurobond market in Q1-2018, was having difficulty funding its $3.5 billion 473km Nairobi-Mombasa expressway project; which was being financed with commercial loans. Not that there is concern that the project would be abandoned: new debt is expected to be in place by mid-year. But with Kenya’s public debt more than 50 percent of GDP already, Central Bank of Kenya governor Patrick Njoroge has started to ring the alarm bells. And so have development partners like the IMF and World Bank. The Kenyan case is instructive because just as it is seeking mulitlateral and capital market debt, so is it also aggressively acquiring expensive commercial bank debt. Neighbouring Uganda, is also increasingly a cause for concern. In the last three years, Uganda’s public debt has risen three times to $15.1 billion from about $6 billion; and more than half of the indebtedness is foreign. Just like in the Kenyan case, the central bank has warned about the disturbing trend. There is increasing risk it might default on its obligations if it refuses to put its appetite in check. The ramped-up Ugandan foreign borrowing is like the Ghanaian case, where an expectation of higher revenue from newly disovered oilfields made the authorities throw caution in the wind. At least, in the case of Ghana, the oil has started flowing; albeit it still does not earn as much revenue yet to justify the earlier recklessness. In the Ugandan case, oil revenue are not expected until 2020 at least. Other African countries of concern are Angola, Chad and Gabon. The Chadian case is a great example of how risky it still is to lend money to African sovereigns. In 2014, Glencore, a commodity trading firm, together with some commercial banks lend Chad $1.4 billion. It was intended that Chad would fulfill its obligations with earnings from future crude oil exports. When oil prices tumbled, the arrangement went up in shambles. Chad was only able to agree a restructuring deal with Glencore and the consortium of banks this year. In mid-April, Fitch, the rating agency, raised concerns about the disturbing trend of such arrangements and the increasing preference of African sovereigns for international debt capital markets; reckoning African sovereigns other than South Africa have to repay at least $6.5 billion in foreign debt over the next five years, more than four times the amount in the preceding half a decade of $1.4 billion. Both investors and issuers should tread with caution.

There have been some pertinent developments since the writing of this article in mid-April and publication in the Q2-2018 issue of African Banker. South Africa sold $2 billion in eurobonds in mid-May. Judging from the orders, it could have sold almost twice as much. Eskom, the country’s power utility, announced in early June it plans to issue a eurobond before end-August; part or all of the $1.6 billion in new external borrowings expected in the current year. In mid-June, Zambia announced it was suspending all planned borrowings indefinitely. Why? Finance minister Margaret Mwanakatwe put it rather well: “The debt sustainability analysis has confirmed that we need to undertake measures to bring debt risk to moderate from the current high risk”. Angolan debt exposure to China has become a source of renewed concerns. Half of Angola’s external debt of about $22 billion are Chinese loans, and another $4 billion is reportedly being negotiated with them; according to the Financial Times in mid-June. As repayments were arranged to be in the form of crude oil, the country’s foreign exchange reserves are not accreting as they could have otherwise. Besides, Afreximbank is already arranging up to $2 billion in new debt, according to Reuters in late May. These are just a few examples. Despite warnings, they point to a continued debt binge on the African continent. And with the American central bank already signalling more rate hikes this year from an increase to 2 percent in mid-June, and the U.S. 10-year treasury yield swinging around the 3 percent area, incremental external borrowings by African sovereigns would be increasingly costly.

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