Sub-Saharan Africa countries will continue accessing foreign debt through the issue of Eurobonds in 2019 as yields in the region rose in 2018.
The rise on Eurobond yields, according to Cytonn Investments, was as a result of the aggressive tightening monetary policy regime adopted by the U.S Federal Reserve, coupled with the China-U.S trade tensions, which dampened investor sentiment in emerging markets.
Africa has increased its appetite for foreign debt in recent times with the latest issues being by the Republic of Nigeria, which issued three debt instruments in November 2018.
The increased affinity for foreign currency-denominated debt by African nations is driven by Reduced financial aid to African countries by Western donor nations, the need to finance heavy infrastructure projects, Covering for budget deficits, and Financing of maturing debt obligations.
Collectively, the year 2018 saw the Sub-Saharan Region (excluding South Africa) raise USD 13.7 bn through various Eurobond issues. The new instruments attracted a lot of interest as evidenced by the oversubscription in all the issues, with the Kenyan issues recording the highest oversubscription of 7.0x, underlining the sustained investor confidence in the African debt market.
This year, plans are underway in Ghana to raise USD 3 billion with Ivory Coast targeting to raise USD 1 billion from Eurobond sales.
The volatility of commodity prices adversely affected export revenues for resource-endowed countries like Nigeria and Zambia but with the truce arrival between US and China after the G20 Summit, yields are expected to stabilize as investors respond positively to the agreement between the two economic powers not to extend tariffs on trade commodities.
As stated by Cytonn in their report dubbed ‘Sub-Saharan Africa (SSA) Eurobonds: 2018 Performance and Effects on Debt Sustainability’, most Eurobond issues in 2018 have been motivated by refinancing needs as part of debt-management strategies mooted by the various governments, with part of the bond proceeds being used to meet existing debt obligations of the respective issuers.
Coming into 2019, yields on Ghanaian Eurobonds are expected to decline due to prospects of relative economic and political stability, whereas Kenyan, Nigerian and Senegal Eurobond yields might rise due to potential political risks arising from the looming elections later in the year in Nigeria and Senegal, coupled with volatility in global commodity prices, especially for oil-producing Nigeria.
The downgrading of Kenya’s debt distress rating from low to moderate by the IMF would mean investors will expect higher yields on any new debt issued.
Cytonn, however, notes that despite external debt being a cheaper and more easily accessible financing option for African governments, it poses the sustainability question due to rising debt levels as well as volatility in commodity prices and exchange rates.
According to the firm, unsustainable debt levels may cause distress and increase the probability of default, and the possible effects of the heavy debt burden will be felt most by the taxpaying citizens. Countries seeking to increase revenue may opt to increase the tax base, eliminate trade barriers and boost local industries as opposed to increased borrowing that is not sustainable