fbpx

Africa Private Equity Insider: What’s The Investing Risk In Eurobond Issuers?

Africa Private Equity Insider: What’s The Investing Risk In Eurobond Issuers?

ngrguardiannews.com
ngrguardiannews.com

The tuna-turned-boats situation provides an extreme illustration about the potentials and pitfalls of access to debt. Like any bond, Eurobond issues can provide a powerful source of financing if spent on activities that can improve productivity and growth.

Tuna-turned-boats

Investec’s de Klerk highlights the importance of those decisions when evaluating risk.

“If the dollars that were borrowed were not spent efficiently (on long-term initiatives to enable economic growth) then the economies might not generate enough economic growth to ensure healthy sovereign balance sheets,” he said.

Eurobonds well-spent, in other words, can lay the groundwork for a more resilient economy later on. Poorer choices, however, can lead to poorer outcomes.

But even where there is concern, situations like these can come with a silver lining. Namely, a lack of dollar financing can help to spur the growth of local currency debt markets.

“The rise in dollar interest rates can be very positive for African economies over the longer term, as this makes it harder for governments to borrow in dollars and thereby run up non-local currency liabilities,” De Klerk said.

“It is not ideal that African governments borrow excessively in foreign currency. It also emphasizes the need to develop local bond markets – a lesson Asian economies learnt from the Asian crisis in the late 1990s,”he added.

If there is something to be gained from the current environment, then, it is the possibility that African Eurobond issuers can begin to deepen their local capital markets.

With more capital available in domestic currencies, non-commodities exporters could have more ready access to finance, and sovereign issuers can borrow without the specter of currency risk. Still better, lenders who make the effort to provide capital locally may not share the same flighty qualities as yield-chasing money.

In other words, more diversification in exports, a more sure source of capital, and less risk in borrowing. Add to that efficient usage of the capital raised, and you could have the beginnings of a beautiful finance friendship.

However, in the meantime, issuers have to get through this tight period: it could cause more than a little bit of pain for some — and hopefully a lesson or two well-learned.

Anna is the founder and principal of Augury Consulting, a communications consultancy which helps asset managers deliver their message to investors and the public with clarity, impact, and authenticity. She regularly contributes to the financial press under her own byline.