By Gregory Smith, PhD
The landscape for African sovereign debt has changed rapidly since the global financial crisis. As lower global interest rates accelerated the search for yield, African governments borrowed from a wider range of sources. 21 African countries have issued hard currency sovereign eurobonds, while taking on other bilateral, commercial and syndicated loans.
There are positives about the opportunities the growing asset class brings for the issuing sovereigns and investors. But there are also concerns about the increasing debt levels and a spike of repayment risk in 2024.
A $100bn African sovereign eurobond space
With record issuance of $27.1bn in 2018, and $7.6bn issued in quarter one 2019 (from Egypt, Ghana and Benin) the asset class has grown rapidly. Total outstanding African sovereign eurobonds reached $102bn in March 2019 (denominated in EUR and USD). South Africa, Kenya, Angola, Egypt (for a second time) and Nigeria could also issue later in 2019, but the total is unlikely to match 2018 issuance.
A trend of issuance has been longer-dated paper. Angola, Egypt, Ghana, Ivory Coast, Kenya, Nigeria, Senegal and South Africa each issued 30-year paper in 2018. Beyond the Mediterranean coast and South Africa, this was rare prior to 2018 and follows a trend started by Nigeria when it issued a 30-year eurobond in November 2017.
21 African countries have outstanding eurobonds
There was issuance from South Africa and the Mediterranean coast in the 1990s, and the Seychelles issued in 2006, but the African eurobond story begins in earnest in 2007 when Ghana, Gabon and Republic of Congo issued eurobonds. There was a pause in 2008 and 2009, but in 2010 issuance picked-up and the asset class reached 10 countries. By end-2014, 17 countries had issued eurobonds following record issuance that year. In 2015 Angola and Cameroon issued sovereign eurobonds for the first time, as did Mozambique in 2016. With Benin’s debut eurobond this year there are currently 21 countries who have outstanding sovereign eurobonds.
The heavyweight issuers have been Egypt and South Africa, followed by Nigeria (also the three largest economies on the continent). The middle-weights, each with multiple eurobonds, are Ivory Coast, Ghana, Angola, Kenya, Morocco, Senegal, Zambia, Tunisia, Gabon and Namibia. Some of the middle-weight’s eurobonds are equal to a substantial proportion of their economies. In Senegal, Ivory Coast, Ghana, Gabon and Zambia their outstanding eurobonds exceed 10% of 2019 GDP. Benin, Cameroon, Mozambique, Ethiopia, Rwanda, Republic of Congo, Tanzania and the Seychelles are currently dipping their toes in the eurobond market with a single outstanding issuance.
A more active approach to debt management
An important shift by African debt managers since 2017 has been to more active debt management. Sovereigns are coming to the markets not only to finance their budgets and investment plans, but also for liquidity management. Bond proceeds have been used to tender and buy-back existing debt and this has helped reduce spikes in debt service costs and reduce repayment risks. Ghana, Senegal, Ivory Coast and South Africa have each worked to smooth their debt maturity profiles in this manner. Ghana, Gabon, Egypt, South Africa and Nigeria each also paid back eurobonds as they matured in 2017 and 2018.
However, challenges remain and there is currently a large spike ($12bn) in African eurobonds maturing in 2024, with the majority coming due from the smaller oil-importing economies. If global markets are not in good shape in 2024, rolling-over the maturing debt will be challenge for many of the frontier markets. The 2018 sell-off of frontier eurobonds under-scored the volatile nature of global debt markets and that the window for issuance can shut when market sentiment deteriorates.
Active debt management is most effective where it takes the entire debt stock into account. Several eurobond issuers have sizeable foreign ownership of their local currency debt. In these countries there is a need to take a comprehensive look at debt maturities, looking beyond the eurobonds, to other external debt, and crucially at years where there are spikes in the amount of foreign-owned domestic debt amortizing.
Foreign ownership of local currency debt
Advice ten years ago to African governments was simply ‘deepen your domestic markets’, but now and as debt risks increase a more nuanced approach is needed. In Ghana, Egypt, Madagascar, Zambia and South Africa foreign ownership of treasury bills and bonds is substantial (over 15%). Egypt and Ghana provide interesting examples for other African countries.
In Egypt foreign purchases of government securities total $15.8bn (40% of outstanding government securities). Only $2.44bn of the foreign ownership is in bonds and the remaining $13.4bn in Treasury bills (17.1% of the stock). This interest dropped in the second half of 2018 as market sentiment soured having peaked at 23.7% in 2018, but interest returned in January and February 2019 as investors end-2018 ‘risk-off’ sentiment shifted back to ‘risk-on’.
In Ghana foreign ownership of government securities is largely in bonds, with just 5% of Treasury Bills owned by non-residents. Foreign investors own 51% of outstanding local currency bonds with maturities of between two and 15-years. Foreign investors hold close to 70% of 10-year bonds and 87% of 15-year bonds. A limited secondary market typically means a longer-term stake in the fast-growing Ghanaian economy.
Efforts are needed to safeguard debt sustainability.
The African eurobond issuers are growing robustly (average growth is forecast at 4.5% in 2019 by the IMF), but the uptake of debt has outpaced the growth of the economies. Average public debt across the issuers has grown from 38% GDP in 2010 (following broad debt relief) to 62% GDP in 2019. While many of the 21 eurobond issuing countries are borrowing like middle-income countries but are not yet collecting revenue like one. The average revenue-to-GDP ratio dropped from 23% in 2010 to 22% in 2019. Hence debt service-to-revenue ratios remain a key concern.
Investment is needed to further develop infrastructure, raise the quality of schooling and health care, and equip the rapidly growing cities with the sewers, safe water supply and public transport they need. While domestic savings are insufficient, financial capital is needed from abroad. Hence there is a case for attracting FDI and borrowing from global debt markets. But care must be taken to ensure debt sustainability, as a debt crisis would reverse some of the recent economic gains and reduce future investment flows.
Gregory Smith PhD, is Director, Fixed Income Strategy, at Renaissance Capital, a leading emerging markets investment bank.