AFRICANGLOBE – A credit boom in Africa that has fuelled an expansion in infrastructure projects across the region is fading out as higher borrowing costs threaten a pipeline of new deals.
Last year, governments in some of the world’s poorest countries borrowed a record volume on international capital markets, issuing more than $9bn in sovereign bonds. So far this year, sales have added up to less than $1.5bn, with just two countries issuing debt.
Ebbing demand from international creditors has pushed down prices for bonds issued by governments such as Ivory Coast, Nigeria and Ethiopia in the past 12 months, raising their borrowing costs.
Last year, Ivory Coast borrowed $750m over 10 years at 5.63 per cent. The country’s 10-year borrowing rate has since increased to 6.27 per cent.
Investors buying into a turnround story led by president Alassane Ouattara, a former International Monetary Fund official who took office in 2011 after a decade of conflict, have seen the value of their holdings fall. The government has cut its growth forecast to 7.9 per cent for 2015, citing the elections set for October as a cause for hesitancy among investors.
“The current challenge [for Ivory Coast] is to transform a turnround story into a sustained growth story,” said Antoon de Klerk, portfolio manager at Investec Asset Management. “As has been the experience of a lot of countries coming out of difficult social times — effecting this transformation can prove very challenging.”
Around the world insurers, pension funds and sovereign wealth funds are reassessing their appetite for risky assets in anticipation of the US Federal Reserve raising interest rates. Currencies in countries including Ghana, Uganda and Tanzania have fallen to new lows against the dollar as investors rebalance their global portfolios.
Lower levels of foreign investment and falling commodity prices are slowing economic growth in Africa, according to the World Bank, which expects 4.2 per cent annual growth this year — a lower rate than the 4.4 per cent average of the last two decades.
However, Nicholas Samara, debt capital markets banker at Citi, noted that Africa may be weathering the challenges better than other emerging markets.
“In general, we are in an environment of higher yields,” he said. “Clearly there is an upward trajectory in US Treasury debt. This does not bode well for EM [but] it is not factors specific to the Ivory Coast that can cause these outflows.”
Charlie Robertson, chief economist at investment bank Renaissance Capital, which has championed African growth, expects debt sales in the region to rebound.
“One of the most significant borrowers in the region is Nigeria which has delayed borrowing because of elections,” he said. “But it may have plans to issue later this year. Nigeria’s external debt is tiny — just 3 per cent of GDP — so there will be more issuance. Further debt issuance is an inevitable part of Africa’s transition.”
The volume of debt taken on by countries in Africa, much of which is not issued in the currency of the borrower, has led to warnings that the continent was risking future stability.
British think-tank the Overseas Development Institute warned earlier this year that the credit boom in Africa was reminiscent of the boom that preceded past debt crises in Africa and Asia.
By: Elaine Moore And Maggie Fick