Africa Private Equity Insider: What’s The Investing Risk In Eurobond Issuers?
Much has been made of African Eurobond debt levels. After a period of strong demand for yield-hungry investors, many African governments now sit with large amounts of dollar-denominated liabilities and a trifecta of global economic issues: a slowdown in other emerging economies, particularly China; a strong U.S. dollar; and a weak commodities market.
Does this spell trouble for Sub-Saharan African issuers?
Of course, it depends. But while painting the region with broad brushstrokes is a huge mistake, one can use a more generic framework for evaluating risk.
A nation’s level of reliance on commodities, the depth of local-currency capital markets, and policy measures with respect to debt and economic activity will largely determine how it will fare in the coming months and years.
The global factors
The present environment is not a simple one, and the market has taken notice — especially when it comes to African debt.
“While emerging market spreads have widened by about 150 basis points, the average African spread has widened by 250 basis points, so unfortunately African countries are affected more negatively than other emerging market peers, mostly due to global factors,” Antoon de Klerk, portfolio manager for Africa fixed income at Investec, told AFKInsider.
Those global factors include the three mentioned above.
Additionally, “Globally there has been an anticipation of the normalization of US interest rates. This has affected all markets, but emerging markets were hit harder,” said de Klerk. “Emerging markets, including African economies, have indeed suffered deteriorating macroeconomic fundamentals, and the rise in interest rates is due to a combination of these factors.”
With commodities prices lackluster, partly due to weakening demand in once-booming China — a major trading partner for much of Africa — economies with a focus on natural resources are coming under pressure.
Heavy dollar-denominated debt loads compound the problem. Commodities are generally priced in hard currency, making Eurobonds a reasonable choice for natural resources exporters.
But the combination of a strong dollar and soft commodities prices can put pressure on countries which lack a diversified export base. Even for nations with a portfolio of exports can suffer; after all, Eurobond interest payments are made in dollars, which are, these days, increasingly expensive.
“Digging into Africa specifically, the concern arises from economies that have a large quantum of dollar denominated debt. This may not be a problem if revenues are also dollar denominated but the problem with many African states is that revenue is largely if not entirely derived from commodity exports,” Mohammed Yaseen Nalla, head of strategic research with Nedbank Capital, told AFKInsider.
“The stronger dollar and weak commodity outlook have thus clouded the outlook for what were once rosy projections for many African sovereigns’ debt sustainability,” he said.
Addressing a problem this complicated is hardly a trivial exercise. But there are best practices and, well, worse ones.
By way of example, Mozambique has been hit especially hard by the current market environment.
In the past year, its currency fell almost 30 percent relative to the dollar. Exports have fallen by 4 percent and foreign reserves by 25 percent. As a commodities-driven exporter (Mozambique’s top five exports are all commodities), the country is feeling pressure from almost every angle.
Matters are not aided by Mozambique’s recent downgrade by Moody’s Investor Service, nor by its somewhat questionable approach to the usage of its Eurobond funds — the nation famously bought coastal patrol boats with an $850 million issue in 2013 which was originally intended for the somewhat more productive activity of tuna fishing.