African bond investors are laying the rules for 2017 after a tumultuous 2015 and 2016. Senegal’s $1.1 billion Eurobond launch earlier this month establishes the parameters.
The offering – more than eight times oversubscribed – demonstrates investors will reward African countries for growth and political stability.
Senegal sold 16-year securities this month with 6.25-percent yield, with investors placing $9.3 billion in orders. The Senegalese government will use the money to fund infrastructure, especially power generation projects and a planned regional commuter train.
The country is hitting full stride, underpinned by offshore oil and gas finds. Senegal never exported either resource at a significant level but all news points to a change in this story.
Cairn Energy confirmed the completion of its ninth successful well in Senegal in three years. Kosmos Energy’s “super-major” offshore gas discovery offers a significant avenue for the development of gas-to-power plants.
Senegalese President Macky Sall has used these resource finds to talk up investment in infrastructure spending and bring more investors to the table. The Senegalese eurobond created a big demand. Considered one of the most stable democracies in West Africa, Senegal expects economic growth to average 7 percent in 2017 and 2018, and, in one investors’ terms, no sniff of political upheaval in sight. Even the African stars Cote d’Ivoire and Ethiopia cannot say that.
The African bond market has grown drastically in the last decade. The market received its initial support from debt cancellation programs, which helped shrink external debt in the region from 76 percent of GDP in 1994 to 25 percent by 2008. These past debts, often tied to official creditors such as the World Bank, could have strings attached and be relieved in one fell swoop when certain measures were met. Bond markets are generally less restrictive, more open minded and consequently the new way to debt for emerging economies. Ghana, the first country to have its debt canceled, issued its eurobond in 2007. The growth in issuances had been well received since then with few hiccups.
Investors however were left in 2016 with a bad taste in their mouth. Nigeria slipped into recession and tainted part of the West Africa growth story. Mozambique, a superstar the two previous years, revealed in April that it had secretly taken out $1.1 billion of loans from two banks, Credit Suisse and Russia’s VTB bank. Mozambique also became the first African country to default on dollar bonds since Cote d’Ivoire did so in 2011 when it failed to settle a nearly $60 million coupon due in January. Halfway into 2017, both countries are still finding their way. Nigeria is still waiting to for President Muhammadu Buhari to fully recover after stints in a London hospital.
Senegal is showing that markets are ready for business in 2017, but a word of caution.
President Nana Akufo-Addo’s victory in 2016 and easy transition of power from John Dramani Mahama should have reassured the market’s steady view of Ghana in the long term. But the country is already disappointing investors with its revelation that it may hold undisclosed liabilities approaching nearly $1.6 billion over the past three years. New Finance Minister Ken Ofori-Atta suggests the deficit may be around 10 percent of GDP in 2016, compared to the forecast 5 percent in the African Economic Outlook. Market debt yields are holding tight on Ghana’s successfully issued dollar-dominated security from September 2016.
Investor trading suggests two things: they hold the previous administration liable for the undisclosed debt if it is found to be true and the new government will have an opportunity to prove out its plan.
Cote d’Ivoire may be the biggest loser in the bond market in the short term. Ivorian officials are hoping to raise $2 billion from the sale of eurobonds next month. But the yields on existing debt have widened significantly in the past two weeks. It is an odd occurrence for the West Africa star child. Four days of soldiers protesting in the streets temporarily dimmed the shine. If yields do not reverse in the next few weeks, Cote d’Ivoire could be the biggest victim of a more demanding market.
Investor interest, particularly from the U.S. and Europe, will continue high in sub-Saharan African eurobonds. Senegal’s oversubscription is an easy indicator of the interest. But what many African sovereign bond issuers will have to consider is how big yields could become. In some corners of the continent, bankers may start to ask if there will be a penalty for those holding significant undisclosed debts.
Call 2017 the year of price correction.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.
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