Opinion
Me-tooism approaches payback time – Hannibal
If your neighbors get a cheap loan to build their new railway, you are going to want one too. But Hannibal cannot help worrying about the flush of ‘me-tooism’ behind the flurry of African countries heading to the international sovereign debt markets.
They might be wiser to first peer over the fence at how quickly the train tracks are being laid and how their neighbrs are planning to pay back their creditors. Those countries sitting ready with sovereign credit ratings are keen to issue euro bonds before the United States (US) Federal Reserve begins the long-awaited process of tapering its quantitative easing program in 2014.
When this begins, US treasuries are likely to become more attractive to global investors, cooling off recent enthusiasm for emerging market debt and meaning African countries could find themselves paying higher rates of interest. In November, Barclays predicted a 20% rise in the sale of emerging market dollar bonds in 2014, due in part to more issuances from sub-Saharan Africa.
Kenya has announced it will issue its first euro bond in January, while Ethiopia, Tanzania and Angola are gauging how soon they can go to market. At the same time, those countries that have already launched bonds are starting to thinking about how to pay back the principal rather than just the regular coupon payments they had to make so far.
The first two sub-Saharan euro bonds outside of South Africa – Ghana’s $750 million bond and Gabon’s $1 billion bond both issued in 2007 – reach maturity in 2017. The two countries are trying different strategies. Gabon has created a sinking fund, paying a portion of its principal over several installments into an account based in the US. Although it missed a few scheduled payments, it seems to have caught up on itself.
When the bond reaches full maturity, Gabon should have put aside around half of the total, still leaving it to find $500m from its budget in 2017. Ghana is starting to pay its debt back – with more debt. When the west African country issued its second 10-year $750 million euro bond in August 2013, Ghana used $250 million of the money to pay back some of its bond due in 2017.
But it paid a premium, issuing the debt with a yield of 8%, compared to the 6% its first bond was trading at. And all this while the country is trying to claw its way out of deep current account and fiscal deficits. Such repayment tactics are common-place in developed countries.
But in the case of African countries with one or two eurobonds this strategy could be “a risky bet”, according to Christian Esters, a senior director for sovereign ratings at Standard & Poor’s. In these relatively untested waters, finance ministers do not know what market conditions will be when they need to issue a new bond.
