African Eurobonds in Q3 2022

African eurobonds traded at Kilimanjaro-high-yields in the third quarter of 2022. Such high (potential) borrowing costs signal that the eurobond market remained shut to all but a few African sovereigns. There was also volatility, with huge swings in sentiment month-to-month. For a few countries the sell-off was worse than peers, but global macro factors dominated this past quarter.

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

Market moves:

• July 2022: Global markets soured and the yields on African eurobond increased. By mid-July African eurobond spreads (a measure of potential borrowing costs) peaked at a 15-year high. But then markets swiftly recovered and bonds rallied (amid short-lived belief that the US Fed might be less hawkish with their interest rate hikes).
• August 2022: The calm continued with less awful markets helping African eurobonds improve further.
• September 2022: Markets soured once again. And the month ended with a global market meltdown. This took African eurobond spreads back to the 15-year high registered in July.

Figure 1: African eurobond spreads

Given the terrible global markets there was very little emerging market issuance during the quarter and none by African sovereigns. African countries borrowing commercially during the quarter did so via bank syndicated loans. The end-quarter stock of African eurobonds was $140 billion (face value), while their market price ended the quarter at $96 billion. Of 137 African eurobonds, 100 had yields of 10% or more, signalling that if refinancing were required it would be generally not be possible. Note that eurobonds have fixed bond coupons (interest rates). So the US dollar cost of servicing existing eurobonds does not change, even as global interest rates rise.

The eurobond market being shut in 2022 and into 2023 is a big problem, but not a complete disaster. Given there are few African eurobonds maturing between now and end-2023. This is because African eurobond issuance was still small (albeit growing) 10 years ago. And also because of active debt management, that is many African countries have successfully refinanced some of their bonds ahead of time. However, the market being shut now introduces worry about whether the markets will, or will not, remain closed in 2024 and 2025 (when there is a huge increase in the number of bonds maturing/ needing to be refinanced). Until global market sentiment improves, it is likely that these concerns will remain.

Bond yields and spreads are useful measures of potential borrowing costs. A quick glance at country yields suggests only South Africa and Morocco would have certain market access, and possibly Namibia and Ivory Coast if maturities were kept short. The only African eurobond repayment in the third quarter was by Ghana in September. The government repaid the remaining $48 million of its $750 million bond issued in September 2016. Thankfully the government had successfully reduced the vast majority of this bond when it had market access in previous years.

Figure 2: Some proxies for borrowing costs (%) (bonds with 10-years to maturity where available, otherwise closest could find)

Credit ratings didn’t change much over the quarter (relative to the market moves). In July Moody’s downgraded Mauritius to Baa3. As the only agency that rates the country its investment grade rating now remains on a slender thread (just it and Botswana remain with investment grade ratings on the continent, although neither have outstanding eurobonds). Fitch introduced a new CCC+ rating (a bit better than CCC but worse than a B-). Mozambique and Republic of Congo got this new rating, that can be considered an upgrade (of sorts) from their prior CCC. Ghana was put deeper in the Cs by all three agencies, each now seeing a substantial risk of a default on commercial debt. Fitch gave their Gabon and Angola B- ratings a positive outlook. Meanwhile Moody’s swapped the negative outlook for a stable one on Morocco’s Ba1 rating, but put their Tunisia Caa1 on a negative outlook.

The big political events included the Angola and Kenya elections. Otherwise there was a lot of IMF watching (with particular attention on Tunisia, Egypt and Ghana’s prospects of getting access to IMF money). Also, after about seven years of discussions, the IMF board agreed a funded program for Zambia. As the IMF acts as an ‘Umpire’ in sovereign debt restructuring negotiations (see my blog here on this), all eyes were on the associated documents that argued a large debt reduction was needed from any debt restructuring with bilateral and commercial creditors.

Ghana’s talks on potential IMF financing are probably the most interesting, because the IMF will need to make a decision whether they require Ghana to restructure its debt (or not) to access emergency financing (again the IMF’s Umpire role). Meanwhile various media stories did the rounds about Ghana considering a domestic debt restructuring (this Bloomberg article for example). While there have been a couple of debt slips on single African eurobonds (for example by Mozambique and Seychelles, more info in my book) and Zambia’s default on $3 billion of face value, a Ghana default (if not avoided) would be larger. Ghana has close to $13 billion of eurobonds (face value), equivalent to around 18% GDP, making the country the largest African issuer relative to the size of its economy.

Ghana has been active in the eurobond market since its debut in 2007 and has successfully repaid two eurobonds. It got to be a eurobond heavyweight in this manner:

• 2001-2009: $750 million issued. Coupons were paid, no principal was due.
• 2009-2012: No issuance. Coupons were paid, no principal was due.
• 2012-2017: $3.75 billion issued. Coupons were paid, plus around $551mn of principal ahead of the 2017 maturity.
• 2017 to date: $11 billion issued. Coupons were paid, plus ~$1.8bn of principal (the final balance of the 2017s, some advance payments on the 2022s and 2023s, plus the final balance on the 2022s).

Otherwise during the quarter I spoke at an interesting African Development Bank event on African debt (video link here). And put out some content on what to read to understand sovereign debt restructuring (see my post here).

Figure 3: Current stock of African eurobonds?