African debt yields fall into uncharted territory


The yield on Ghana’s Eurobond, a benchmark for African frontier market debt, hit a record low yesterday, highlighting the unseated foreign appetite for off-the-beaten-path assets offering decent returns.

The $750 million 10-year Eurobond, launched in 2007 with a coupon of 8.5 %, saw its yield touch 6.544 %, well below levels of 7.8 % in early 2008 before the global financial crisis struck.

The yield on the bond, the first dollar-denominated debt issued by a sub-Saharan government apart from South Africa, spiked above 23 % in December 2008 as panicking foreign investors dumped emerging market assets.

A Eurobond issued by Gabon shortly after Ghana in 2007 has plotted a similar course, with its yield falling to 6.28 % yesterday, well below its initial 8.2 % coupon.

Local currency debt on the poorest continent has followed the same trajectory amid a surprisingly strong regional recovery from the 2009 global economic slump and an increasingly favourable outlook for inflation.

In Kenya, three-year shilling-denominated debt is yielding less than 7 % compared to around 9.1 % in March 2008.

In Nigeria, Africa’s largest oil producer and most populous nation, yields on three-year paper are at 4.26 %, and sat below 4 % for most of March, forcing domestic investors facing annual inflation at 11.8 % in March to look elsewhere.
“It makes sense for Nigerian investors to take positions in other sub-Saharan fixed income markets, preferably at the highest-yielding short end of the curve,” broker Renaissance Capital said in a research note. The debt rally is part of the wider search by investors for high-yielding, riskier assets that saw emerging market bond funds attract record inflows in the week ending April 14, according to fund tracker EPFR Global.

More exotic sovereigns such as Uganda, Tanzania and Zambia have also been swept along for the ride, further evidence of frontier Africa becoming part of the global investment jigsaw.

Even when central banks in the United States and Europe start raising interest rates from their record lows, African returns will still be attractive to foreigners, leaving little reason to see the demand reversing, analysts say.
“There seems to be a general market feeling that the Fed will have to hold off at least for two or three quarters. That leaves people asking, beyond capital preservation, where to get spread,” said Nina Shapiro, an African debt specialist at the World Bank’s International Finance Corporation. “Africa is a place where there is new interest, especially for countries with resources or with governance stability.”

One question mark will be around the willingness of African governments to withdraw the emergency fiscal stimulus introduced last year, when their debt is the cheapest it has ever been.
“With growth returning, the deficit situation should improve naturally but spending programmes can become entrenched,” said Stuart Culverhouse of London-based brokerage Exotix.
“Even though there’s been no action on this so far, investors, especially foreigners, will be watching carefully to see how governments perform in reining in stimulus.”

Pic: Flag of South Africa