Politics
More African Countries on Hunt for Eurobonds
Other reasons behind the recent surge in borrowing by African countries, according to the IMF, are changes in the institutional environment, such as more flexibility for low-income countries with access to non-concessional borrowing, reduced debt burdens, large borrowing needs and historically low borrowing costs.
But there are serious challenges to Africa’s future in international markets, analysts warn. Buyers of African bonds raise concerns about the countries’ vulnerability to commodity prices, political instability, fiscal irresponsibility, lack of reliable statistics and transparency, and poor histories of debt management. Therefore, sovereign bonds issued by resource-rich African countries are deemed risky assets by some investors.
Recent speculation that the U.S. Federal Reserve bond-buying programwould end in 2014, along with rising U.S. treasury yields, sparked a sell-off in emerging markets, Angus Downie, the head of economic research at Ecobank, a pan-African bank, told Business Daily of Kenya. “Investors will want higher yields,” he says. Since the beginning of 2014, the Federal Reserve has started cutting back on its bond-buying programme, leading to speculation that this might spark an increase in interest rates.
Higher interest rates raise the cost of servicing the national debt. In a recent article, the Wall Street Journal showed Nigeria’s Eurobond trading at a yield of 6.375 percent, up from 4 percent in late April, because of waning investor interest, adding that Rwanda is now trading north of 8 percent.
On the flip side, these bonds have not been the saving grace that African countries thought they would be. In an article entitled “First Borrow,” Amadou Sy, deputy division chief of the IMF’s Monetary and Capital Markets Department, points to some recent sovereign defaults in sub-Saharan Africa.
The Seychelles defaulted on a $230 million Eurobond in 2008, after a sharp plunge in tourism revenues and years of excessive government spending. Côte d’Ivoire missed a $29 million interest payment after its 2011 election disputes forced it to default on a bond issued in 2010. Ghana and Gabon are struggling to find money for a $750 million and $1 billion bond, respectively, on 10-year Eurobonds that will reach maturity in 2017. But this has not deterred African countries from issuing bonds, although they are borrowing at high interest rates.
