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Sub-Saharan African bond rush goes on

Despite risks to borrowers, investors.

LONDON – Sub-Saharan Africa’s hard currency borrowing bonanza shows no sign of slowing down from last year’s record, despite some concern that rising debt levels in some countries could spell trouble in future.

Governments across the continent have rushed in recent years to take advantage of rock-bottom global borrowing costs and investors’ hunger for yield, with issuance of hard currency debt rising from $67 million in 2008 to more than $8 billion last year, according to Thomson Reuters data.

Successful issuers have ranged from big oil-rich Nigeria to smaller, fast-growing countries such as Ethiopia and Rwanda that were once defined by famine and civil war.

Now, with the Federal Reserve likely to hike interest rates later in the year, the cost of servicing the debt will increase and future borrowing become more expensive at a time when many governments feel the squeeze from low oil and commodity prices.

Yet this is unlikely to deter countries from tapping international capital markets, said Ravi Bhatia, director of sovereign ratings at Standard & Poor’s, who expects borrowing in 2015 to be broadly in line with last year’s numbers.

“We are still seeing this boom in eurobond issuance…and this trend is going to continue, despite tougher market conditions and higher yields at issuance,” said Bhatia.

“Because the oil price has fallen and the commodity prices are subdued, they need a financing channel, and a lot of them are going to look at the eurobond story.”

In March, phosphate and peanut exporter Senegal announced it planned to issue between $500 million and $1 billion. And faced with a widening budget deficit due to weaker commodity prices, oil producer Ghana said on Tuesday it would increase the size of its eurobond from $1 billion to $1.5 billion.

Bhatia also expects Africa’s top oil exporter Nigeria, fellow petroleum producer Cameroon as well as coffee grower Ethiopia to possibly come to market in the next six months.

And copper producer Zambia, which in June endorsed a proposal to almost double the limit for external borrowing to invest in infrastructure and support small and medium enterprises – was on the last leg of a roadshow on Wednesday in New York, also eyeing a return to markets.

The drop in commodities prices seems to have done little to deter investors.

Cocoa producer Ivory Coast’s $1 billion eurobond issued in February was subscribed almost 4 times, Gabon’s $500 million sale in June even more than 5 times. Both yielded just under 7 percent .

Charles Kie, head of investment and corporate banking at pan-African lender Ecobank, agrees that issuance is likely to continue rising, warning that with commodity prices unlikely to shoot through the roof in the near future issuers needed to show fiscal discipline.

“It is an area of concern,” said Kie. “If African countries do not manage the sustainability of their indebtedness that bubble will blow up.”

Most countries in Sub-Saharan Africa feature a low debt-to-GDP ratio compared to developed nations. But almost a decade after the IMF and World Bank launched the Highly Indebted Poor Countries (HIPC) initiative, which saw up to 30 low-income sub-Saharan African countries getting their debt reduced, ratios have crept back up.

A World Bank study published last August found 26 African HIPC beneficiaries had seen nominal public debt fall on average to 27 percent in 2006 in the wake of receiving debt relief from an average of 104 percent beforehand.

Yet in Ghana, debt-to-GDP had risen back to 55 percent in 2013, while Zambia’s ratio rose to 34 percent in 2014, according to data from Oxford Economics.

“We have been flagging concerns over over-rising debt stocks, over-sizeable fiscal deficits, over-current account deficits, and the trajectory of (sovereign) ratings has been downwards,” said S&P’s Bhatia.

“It is something that has to be watched.”

Others, such as John Bates, senior vice president at asset manager PineBridge Investments, are somewhat less concerned, pointing to underlying macroeconomic dynamics.

“The fundamental reasons for Sub-Saharan African economies to issue are still very much valid: the growth dynamic, improvements in weather cycles and population, infrastructure investment and long-term investments,” said Bates, although he acknowledged that some countries are becoming stretched.

Yet with no principal eurobond repayments due this year or next, issuers do have a bit of breathing space.

The World Bank estimates economic growth across the region to slow from 4.6 percent in 2014 to 4.2 percent this year.



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