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US Fed Rate Hike To Crush Africa’s Sovereign Bond Euphoria

US Fed Rate Hike To Crush Africa’s Sovereign Bond Euphoria

African governments “debt market euphoria” could come to an end this December if the US Fed hike interest sending international investors out of emerging and frontier markets.

Many African government capitalized on a window of opportunity created by historically low yields on the international market due to low interest rate in the U.S.

African countries have borrowed a record $100 billion from global capital markets in the last few years, even as the International Monetary Fund (IMF) and central bankers cautioned on nations on the continent could overload their economies with too much debt and derail the best economic period for the region in a generation, Financial Times reported.

US Reserve Bank’s quantitative easing that started in late 2013 has helped keep benchmark interest rates at historically low levels and stimulated a flurry of bond issuance by African countries before the coat of borrowing climbs to unattractive levels.

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For now, yields on dollar debt in Africa remain fairly low by historical standards and the “African bond rush” is set to continue, Capital Economics African economist Shilan Shah told BDlive.

International sovereign bond sales by African government have reached over $4.5 billion in just six months of the year, meaning government capital-raising this year  in Africa is on track to beat the record $5 billion it raised last year in total dollar-bond sales.

Standard & Poor’s Ratings Services projected that the 17 sub-Saharan African sovereigns that it rates would borrow an estimated $13 billion in sovereign bonds this year.

Countries that have already issued their bonds this year include Kenya’s $2 billion in June, closely followed by Ivory Coast’s $750 million, both which were heavily oversubscribed by yield hunting foreign investors.

South Africa, the continents second largest economy, has also taken advantage of the trend and successfully issued a $1 billion 30-year and a €500 million 12-year bond issuance on international capital markets.

This month, Senegal jumped into the bandwagon with its first dollar bond in a little more than three years. The West African country is seeing to raise $500 million from the 10-year debt sale at a yield of 6.25 percent, WSJ reported.

Zambia, Morocco and Ghana have also lined up plans to tap the international debt market while rates are still this low.

“Assuming that credit spreads don’t fall sharply, yields are likely to rise in line with those of underlying US Treasuries as attention gradually shifts towards the timing of the first hike in the Fed funds rate,” Shah told BDlive.