In Africa, It’s Boom Time for Bonds

Quite the juxtaposition of headlines to start May: Bloomberg reported that the world’s 200 richest people added $45 billion of collective net worth in the week, as the Dow Jones industrial average hit 15,000. At the same time, the capital markets of sub-Saharan Africa, which has some of the poorest nations on earth, are feeling a financing boom unlike anything they’ve ever experienced, according to Chris Kay, a Bloomberg News reporter in Nigeria.

Street scene near Makola Market in downtown Accra, Ghana

Both phenomena can thank central banks in the developed world for keeping rates painfully low, forcing investors into risk assets in search of return.

The largely unintended consequence of sub-Saharan Africa’s large borrowing window could not come at a better time. Excluding more-developed South Africa, the countries of the region are placing $7 billion of debt this year, more than in the past five years combined, at yields double that of U.S. Treasuries but still lower than what these economies have ever paid. International investors are grabbing for yield and growth. The International Monetary Fund sees the subcontinent posting growth rates of 5.6 percent this year, vs. the developed world’s 1.2 percent. But the region is losing upwards of 2 percentage points of growth because of woefully inadequate infrastructure such as bridges, power generation, roads, and wastewater treatment.

So it helps greatly that these economies can now cash in their superior growth rates for some degree of financial autonomy—and better roads. According to JPMorgan Chase (JPM), average yields on African debt fell 88 basis points in the past 12 months, to 4.35 percent. Nigeria, Gabon, Ghana, Ivory Coast, Namibia, the Congo, Senegal, and the Seychelles have all seen their borrowing costs fall this year. Rwanda cannot sell enough of its bonds.

“Risk premia across the world are getting repriced,” says Larry Seruma, chief investment officer of Nile Capital Management, which invests in Africa. “You have too much money searching for yield, and as safe assets become scarce in the developed world the money has ultimately started to flow to Africa.”

Seruma also credits a broadening of political stability and better governance. For example, Kenya, East Africa’s largest economy, recently saw a peaceful transfer of power (unlike in 2007), despite the victor winning with only 50.6 percent of the vote. In March, Kenya’s finance minister said the country expects to sell sovereign bonds by September, raising as much as $1 billion.

Nigeria, the continent’s oil heavy, is looking to offer $1 billion in Eurobonds this year. Seruma notes that its debt is now part of the JPMorgan and Barclays (BCS) local bond indexes, mandatory benchmarks for many portfolio managers.

Neighboring Ghana, whose 10-year bonds issued in October 2007 have since fallen 3.43 percentage points in yield, to 4.82 percent, wants to sell more than $1 billion in dollar debt this year; it has a creditworthiness to parlay. Angola, Tanzania, and even Mozambique and Uganda are also exploring their debt options with bankers. (That sentence would have been impossible to write just a few years ago.)

Amid the debt frenzy, sub-Saharan stock markets—tiny, illiquid—have similarly been in clover, with Ghana’s up 47 percent, Nigeria’s up 24 percent, and Kenya’s All-Share Index up 30 percent year-to-date.

What will be fascinating to watch is how all these countries service so much easy-money debt when the credit cycle turns, or if commodities and political stability decline. At least for now, though, you get the impression that sub-Saharan Africa has turned a corner in global capital markets.

Source: Bloomberg Businessweek