SSA Returns To The ‘Original Sin’: A Case Against African Sovereign Bonds

Written by Kevin Mwanza

African countries issued a record six sovereign bonds in 2013 that raised a total $4.3 billion and dwarfed the $1.7 billion raise the previous year, something that has enticed more countries, including some with questionable debt histories, to tap the international credit market for all sort of funding.

In total combined dollar-bond sales from African governments and companies rose to a record $9.68 billion in 2013 from $6.04 billion in 2012, Megan McDonald, Standard Bank Group Ltd.’s head of debt primary markets told Bloomberg.

The six countries that floated bonds last year include Nigeria, Senegal, Zambia, Rwanda, Gabon and Namibia. These nations driven by a bid to access long-term dollar financing for infrastructure investments, diversify sovereign borrowing sources and establish benchmarks for corporate, have tapped the international market for debt financing.

sovereign bonds

Kenya, Zambia, Angola and Mozambique are among governments planning Eurobond offers as African nations seek to replace existing debt or fund infrastructure such as road, rail and energy with debt, Bloomberg reported.

But is this unabated borrowing sustainable?

The Overseas Development Institute (ODI), says that the $5 billion raked in from sovereign bond issued in  2013 was equivalent to 20 percent of annual aid to Sub-Sahara Africa (SSA) and 12 percent of foreign direct investment inflows to the region.

SSA Rising debt-to-GDP ratio

According to the World Bank’s report in April, this amount of debt accumulation has pushed up SSA’s debt-to-GDP ratio from 29 percent in 2008 to 34 percent in 2013. Although this still remain low compared to emerging markets, weaker capital markets and low institutional capacity to absorb funds in the region makes this public debt situation a  bit wanting.

“…when investors buy bonds sold by sleaze-ridden governments, it is surely as dubious as giving a bottle of whisky to a known alcoholic. It is not against the law. But at best it is unethical and immoral, and the giver is complicit in the consequences,” euromoney quoted Michael Holman, FT’s former Africa editor, saying about the potential risk occasioned by such debts.

Holman further arguing sovereign bond deals are a means of side-stepping the scrutiny and conditionality of multilateral lenders.

African countries were heavy beneficiaries of a debt write-off program in the 90’s after most kleptocratic rulers on the continent took on large amounts of foreign debt that saw over 30 SSA governments riddles with as much as $100 billion in unpaid debt that was eventually cancelled by international lenders to pave way for a regional economic resurgence.

Fast forward to 2007 and selective amnesia kicked in as Ghana became the first SSA nation to issue a Eurobond worth $750 million with a 10-year tenure. Within the same year Gabon, one of the least democratic country on the continent that depends largely on oil revenue to meet its budget needs, also issued another euro note.

At the time these two were seen as exceptions, but as Holman says, this was the first vodka sip of a recovering alcoholic.

Since then more countries have streamed in for Eurobonds with Ghana and Gabon, two countries that have recently joined the oil producers league, coming back for second and even third servings. The pricing of these issues has also been very aggressive even with a turn in the global commodities cycle and jitters over China, confirming foreign-investor confidence in the continent’s domestic growth engines.

“Technicals are at play too. Specialist funds have had no choice but to pick up African credits given the dearth of relatively high-yielding dollar-denominated EM sovereign paper,” Sid Verma says in a euromoney piece, but goes ahead to caution investors against piling up on such bonds.

Tapering creates FX Depreciation risk

Apart from the moral hazard pointed out by Holman, Verma says this return to the “original sin” could leave investors under water as the US tapering program triggers capital outflows from frontier economies such as SSA and the risk local currencies depreciation increases foreign-debt servicing costs.

These could easily trigger defaults across the continent, which will not be the first time for it to happen. recent history of African debt issuance is littered with bad omens: with war-torn Cote d’Ivoire restructuring its debt in 2011 after defaulting on its $2.3 billion 2032 bonds; in 2012, Gabon delayed a coupon payment, for the second time, on its 2017 paper; while in 2011, the Seychelles defaulted on its $230 million bond launched in October 2008, which represented a hefty 40 percent of GDP at the time.

Taking into consideration the currency devaluation factor due to high inflationary pressures in most African countries, the competitive coupon rates may not be what they potent to be. A closer look at the local debt yields most likely points a different picture that tells the true story.

“Ghana issued a bond in 2013 and its coupon rate was 7.875 percent. Interest rates on local debt can be 19 to 23 percent. Debt service on the Eurobond looks much lower at first glance, but would actually be very similar (7.875 plus 14.35 is around 22%) on domestic and sovereign bonds if we take into account annual exchange-rate devaluation [around 14% per year since 2007],” Dirk Willem te Velde, head of the international-economic development group at the ODI told euromoney.

“Ghana is also much more dependent on global conditions. This simple comparison suggests that it would be wise to pay more attention to the development of domestic bonds, as the currency risk is taken on by the bond issuer.”