African hard-currency sovereign debt, all of it rated junk, is finding buyers as investors look to shield their cash from the fallout of the war in Ukraine.
Of the nine developing nations which have seen their debt gain amid the risk-off mood, four are countries in Africa which are isolated from the conflict both geographically and because they export some of the commodities that have surged as a result of it. South Africa — rated three steps below investment grade at S&P Global Ratings — is leading the pack.
The country’s dollar bonds have returned 1.75% this month, compared with the 2.3% average drop for the 74-member Bloomberg Emerging Markets USD Sovereign Index.
“Within the EMEA space, there have often been allocation shifts between Russian, Turkish and South African sovereign bonds, depending on geopolitical developments,” said Simon Quijano-Evans, chief economist at London-based Gemcorp Capital Management Ltd. “South African bonds are now clearly benefiting from the paradigm shift that we are seeing in eastern Europe. It is all about relative stability.”
For other African borrowers, outperformance has been driven by re-allocation as well as “higher oil prices, which have helped the likes of Angola, Gabon and Nigeria,” he said.
Even before the Ukraine crisis, dollar bonds had been off to the worst start since at least 1995, as global central banks began to tighten monetary policy. High-yielders, though, were faring better, shielded by lower sensitivity to rate hikes.
While soaring inflation on the one hand, and the prospect of slowing economic growth on the other, are complicating policy makers’ task, the broad narrative hasn’t changed. That means the outperformance of African dollar debt may continue as their relatively higher yields attract buyers.
The average yield premium of dollar bonds in sub-Saharan Africa narrowed 12 basis points on Monday even as Treasury yields soared to three-year highs.
The rise in prices of non-oil commodities such as copper and palladium may keep Africa’s debt on investors’ radars as well. Commodity producers can expected resilient currencies thanks to better terms of trade, and improved fiscal revenues, said Delphine Arrighi, the London-based head of emerging market debt at Guardcap Asset Management Ltd.
“Central and eastern Europe looks most at risk while the likes of South Africa and Latin American commodity exporters should fare better,” she said.