The fact for almost all Sub-Saharan African (SSA) economies is that debt, particularly foreign currency debt, has gained its importance as a critical source of development finance for the region. Access to the Eurobond market (bonds issued in foreign currencies), tend to be an attractive source due to high investor interest and the absence of policy restrictions in the market.

Unlike the inflows from multilateral and bilateral corporations like the IMF, which tend to be burdened with uncomfortable scenarios and policy restrictions that necessitates austerity measures, inflows from the Eurobond market are free from any form of restrictions, apart from the usual repayment cycles with interest rates known as coupon rates.

This benefit increases the attractiveness of the Eurobond market over other multilateral corporations in the eyes of almost all SSA governments. Are these perceived benefits valid enough to welcome the Eurobond market with open arms?

Sub-Saharan Africa Eurobonds, most of which are listed on the London and Irish Stock Exchanges, allow governments and corporations to raise funds by issuing bonds in a foreign currency (usually in dollars) to finance maturing debt obligations and heavy infrastructural projects.

For more than two decades, SSA countries have explored the Eurobond markets with debt instruments ranging from four (4) to forty (40) years issue tenors. South Africa was the first to enter the Eurobond market in 1995, but it was not until 2006, that Seychelles made its expedition into the international financial markets with the issue of its $200 million Eurobond. Since then, twenty-one (21) SSA countries including Ghana, Gabon, Senegal, Nigeria, Namibia, Côte D’Ivoire, Zambia, Rwanda, Kenya, Ethiopia, Angola, Cameroon, etc. have issued Eurobonds, with values generally ranging between $500 million and $1 billion.

Between 2006 to 2015, the total value of yearly issues of Eurobonds by SSA governments rose from about $200 million to $6.3 billion, with a cumulative value of $20.8 billion. As of July 2021, SSA Eurobonds issue had a cumulative value of $136 billion, with 21 SSA countries holding one or more outstanding Eurobonds. The first half of 2022 has seen Nigeria and Angola Eurobond issuance raising $1.3 billion and $1.8billion in March and April 2022, respectively.

Investor interest in SSA Eurobond market

What could be the major incentive for the avalanche entry into the foreign debt market? A possible reason could be that governments are able to borrow more in larger amounts in foreign currency compared to the low volume local bond market. This is underpinned by the high investor interests in African Eurobonds. Foreign investors can’t get enough of Africa’s debt to the extent that almost all Eurobond issues get oversubscribed. For instance, Zambia issued a $750 million bond in September 2012 but received orders from investors to the tune of $11 billion – thus, over twelve times the amount the country intended to raise. Again, another $1 billion Zambian Eurobond in 2014 also received investor orders to the tune of $5 billion. Additionally, Rwanda’s initial $400 million bond in 2013, Senegal’s $500 million bond in 2014 and Côte D’Ivoire’s $750 million bond in 2014 were eight times oversubscribed as was Kenya’s $2 billion bond in 2014 that was four times oversubscribed, and Ghana’s above mentioned 40-year $3 billion dollars Eurobond was almost five times oversubscribed, with bids reaching $14 billion.

This keen investor interest in SSA countries’ bonds is principally because of higher interest rates offered by SSA Eurobond issuers compared to a much lower interest rate levels in the US and in other developed markets. For instance, SSA Eurobonds offer between 5-6% interest rates on a 10-year debt instrument compared to an almost zero or negative interest rates in Europe or US. The African Eurobond market thus is a more attractive market to foreign investors making it a promising funding source for SSA governments.

However, the relatively high interest rates offered by SSA Eurobond are a reminder that funds raised in international financial markets are costly and ought to be used for intended purposes that yield high returns.

A Beast in the Beauty?

For every investment, there exists an underlying risk for which both the investor and the issuer must not be oblivious about. But what possible risks are there in a market so attractive to both the issuer and the investor? Could there be a beast hidden somewhere within this beautiful investor friendly and restriction free Eurobond market?

A critical caution worthy of attention is the issuing currency nature of the Eurobond market and the challenges with foreign exchange rates. Most, if not all Eurobonds issued by SSA nations are in US dollars. Since Eurobonds are denominated in foreign currency, any depreciation in the national currency of the issuer means that the country will incur a relatively higher cost to purchase foreign currency used in servicing outstanding debt obligations. This currency disparity unfortunately increases the nominal values of the bonds above the values at the time of issue, hence increasing the debt stock of most SSA countries and in the event of inflationary pressures, leads to the draining of international reserves.

The sweet pill that draws the attention of all, tends to gradually get bitter in the belly.

Another critical issue is the continual rise in bond yields which affects debt serviceability of some SSA countries leading to default. In 2020 and 2021, for example, Zambia failed to make Eurobonds interest payment totaling $98.6 billion as the nation struggled to fight the COVID-19 pandemic and sustain the economy.

The table below gives information on changes in yield of Eurobonds of some selected SSA countries. 

It is evident from the table above that the Eurobond yield rates continue to rise, and this is attributable to the high-risk perception attached to the countries. Consequently, the more the yield rates rise, the more a country needs foreign currency to service its debts. The likelihood of default then becomes high. 

In Ghana, the depreciation of the currency has worsened debt repayment due to high interest rates amid slowing fiscal consolidation. The public debt stock continues to increase largely due to continuous accumulation of budget deficits, the currency depreciation, and off-budget borrowings. This has led to the country being classified by rating agencies as high risk of debt distress as the country struggles to service its debts. 

To add insults to injury, a negative or downgraded credit rating has the likelihood of shutting a country from the Eurobond market. Currently, Ghana seems to be at the receiving end of credit downgrades and being locked out of international debt markets. This situation, coupled with inflationary concerns, drove the government to seek an IMF debt-relief program before public finances deteriorate further.

This illustrates that the risks of international currency borrowing are high as opposed to those of domestic currency borrowing even though the domestic borrowing usually have relatively short maturity periods. It is therefore crucial for SSA Countries to develop their domestic capital markets in order to improve the issuing of bonds in local currency. This will be a long-term hedge from the risks associated with international currency borrowing. Although African countries need funds for their development, the continent should not be a net capital exporter to the rest of the world.

As such, SSA nations with plans to issue Eurobonds will have to use financial risk management instruments such as derivatives (options, currency swaps) and hedging to minimize the risk of the rising nominal values of the bonds.

Conclusion

The SSA region’s economic recovery has been hit by surging fuel and food prices that have strained the external and fiscal balances of commodity importing countries. However, in order to finance the fiscal deficits as well as existing debt, the countries in the region are expected to return to the market for further issuance.

Prudent borrowing, either in the domestic or international markets, is essential in maintaining macroeconomic stability and promoting growth. Therefore, with rising public debt and debt sustainability concerns, SSA countries are faced with one of two choices, either restructure the existing debt or restructure their economies to be more productive to service the existing debt even as they reduce future borrowings.