African eurobonds: Q1 2022 update

This is a quick update on the African eurobond space, focused on the first quarter of 2022. For an in-depth discussion of African debt please read my book ‘Where Credit is Due: How African Debt Can Be Benefit not a Burden’.

January to March 2022 was a quarter characterized by market volatility. As concerns about the risks of investing across emerging markets heightened. This was caused at first by a hawkish Federal Reserve (and the prospect of higher global interest rates). Then linked later in the quarter to Russia’s invasion of Ukraine. These events caused emerging market bonds to sell-off. African eurobonds were not spared. The weakness spiked at the end of February 2022, but recovered partially in March 2022. There was some differentiation between sovereigns as higher oil and metal prices meant the bonds of countries exporting such commodities fared better. While higher global food and fertilizer prices were expected to negatively impact many African economies. All African eurobonds (except Angola’s) ended the quarter weaker.

Ghana’s eurobonds have been trading at stressed levels (preventing market access) since the latter months of 2021. The government tried to court investors in January with a presentation highlighting their reform plan, but the bonds did not rally in response. The markets' skepticism was backed by Moody’s who downgraded Ghana to a Caa1 credit rating. This was Ghana’s first ever ‘c-level’ rating since they were first rated in 2003. The downgrade led the Ghanaian government to publicly criticize the rating agency and claim that alternative agencies are needed. Meanwhile Angola’s credit rating was upgraded by S&P, a move that put all 3 of its ratings back in the Bs (following IMF supported reforms and higher oil prices).

While its eurobonds came under pressure, Egypt saw it debt management reforms rewarded by 12 of its local currency bonds being included in JP Morgan’s global bond index. Such inclusion is crucial for African economies as it represents an important step towards attracting inflows from a wider investor base, and in local currency denominated longer-maturity securities. These carry less risk for sovereigns than hard currency eurobonds.

There was no sovereign African eurobond issuance in January and February 2022, mirroring the situation across emerging markets, where issuance was at the lower end of the historical trend. As most high-yield (that is non-investment grade) sovereigns postponed their plans given the weak markets. However, Nigeria’s Bank of Industry (a development bank), issued a EUR 750mn eurobond, maturing in 2027. While this was not a sovereign eurobond, it does have a sovereign guarantee. The only African sovereign eurobond issuance came late in the quarter from the Nigerian Federal government. In March 2022 they priced a $1.25bn bond maturing in 2029, with a coupon of 8.375%. Given the weak markets the country paid a premium to attract investors (NB Nigeria issued similarly sized 7-year eurobonds in better markets in 2018 at 7.625%, and in 2021 at 6.125%).

Zambia is still working on a restructuring of its 3 eurobonds (with a face value of $3bn), having defaulted in 2020. Meanwhile all the other 133 African sovereign eurobonds are being serviced. With Nigeria’s recent issuance, and other bonds being repaid, the total face value of African eurobonds was $140bn at the end of March 2022, issued by 20 African countries.

While the asset class continues to grow the debt risks in many African countries have increased since the start of the pandemic. Hence efforts for better borrowing (as set out in my book) remain essential if the asset class is to prosper and continue to provide African countries with investment opportunities. I also published my views in a recent article for the IMF (found here) stating that ‘African countries access to global capital markets should be celebrated, but the road is bumpy and a more robust vehicle is needed’.?If changes are not made, the asset class remains vulnerable to another global recession, large economic shock, or even just sustained higher global interest rates. Such events would make many countries debt unsustainable. Given the risks, a debt rescue plan should be developed, so that it could be utilized if many countries are forced to restructure their debt at once.