What beats me is that despite yield being record low in Japan and the U.S yet negative in Europe, investors are still shying away from Africa. A little trip down memory lane when Europe was in recession, it was said that no where on earth could anyone get excellent returns than in Africa. This signified the genesis of the eurobond scramble. Nations like Zambia made remarkable debuts at record yields of 5.25%. Zambia’s $750m celebrated debut was 24 times oversubscribed with book orders totaling $24billion. Former war tone nations such as Ivory Coast issued $1billion at far better yields than East Africa’s largest economy Kenya at 6.75%. South Africa, Ghana, Uganda, Angola and Rwanda followed suit. However as Europe recovered, yields on dollar debt issues started to rise to double digit recently. Ghana, Africa’s second largest cocoa producer is planning a fourth appearance in the international capital markets with IMF guarantee on a portion of the debt. Indicative pricing was double digit which the west African nation deems a reasonable premium for the current level of inflation. African Eurobonds are paying between 350bps (SA) to 1800bps (Mozambique) spreads above 10 year US treasuries. Off Course affecting the default spreads are sovereign country ratings of respective nations.
Local yield very attractive
Because most African nations are faced with budget clutching issues due to falling commodity prices to include oil and copper. It is the reason why Zambian Kwacha, Angola Kwanza, Nigeria Naira, Mozambique Metical and Congolese Francs are called commodity currencies. These nations depend on proceeds from exports of commodities to finance their respective budgets. Because currencies devalued inflation spiraled upwards. To make real returns of bond yields positive, governments tightened monetary policy to push returns higher. There exists a positive correlation between bond yields and level of inflation. Liquidity for these nations was and is still tight. However a weak local currency and high yields was very good arbitrage position for offshore investors. Africa is paying 7%-29% yields on government debt currently.
Commodity price recovery
A bullish outlook lies ahead of commodities ranging from crude to copper, Citi Bank has projected. Much as Africa is Dutch diseased a rally in commodities is like winning a jackpot for the continent. The world is currently more sensitive to good news than bad news. The worst has been experienced no amount of bad news can sink commodities any further. This signals the end of the plummet after which a recovery is expected. Business cycles are said to have time frames namely boom, peak, recession and recovery. What we are experiencing in copper is not new to the world. Commodity players and investment banking firms are all 2017 bullish about prices. African nations are projecting higher industrial commodity productivity which is linked to improved power outlook. Most metal productivity cuts were due to power rationing. Nations like Zambia have wildly optimistic targets of 1,500 million tones for 2017. That would be doubling of its precious annual production. Gold and silver are at their 2 year apexes as volatility and uncertainty clouds Europe and the global economy. It shouldn’t be rocket science that investing in mining stocks is the way to go. Africa has all this to offer.
Resilient economic growth
With the worlds economic engines slowing down from China to United States. Global growth forecast by IMF is set to be between 2%-3% for 2017 with a revision to 1.4% (from 1.6%) for the eurozone area. Africa currently has the highest growth rates with the sweetest spots being West and East Africa. West African nations like Ivory Coast are forecast to grow 10.78% in 2016 with immense opportunity in power generation which is on high demand in Africa. The East Africa growth average is 6.8% covering Uganda and Kenya the coffee and tea producers, Rwanda (the Switzerland of Africa alone has a projected 10% growth rate) and Tanzania with recent helium discovered deposits. Other nations include Zambia, Gabon and Ethiopia are expected to record above sub Saharan average growth rates in 2016. Why wouldn’t investors rush to tap these growth curves?
The window for cheaper funds just opened
Much as debt accumulation has been discouraged, this may be the right time for accessing cheaper funds. The cheapest Eurobond yields were experienced at time when Europe was in recession. What we see today is a re-opening of the window. Surely how much evidence do we need to prove that the world is desperate for high yielding investments? Qatar just sold $9billion in dollar bonds in an auction that had $23billion in book orders. DRC has been itching to make a debut for $1billion. Ghana with IMF guarantee wish to make a 4th appearance for a billion dollars. If yield has been the biggest deterrent, testing the waters know will highly likely yield indicative rates that are single digit. I’m not a bonds trader but understand the debt market so well that I know gold when I see it. US Fed rate hike is very unlikely with a 21% probability for this December. This will impact dollar bond yields positively as markets will not expect any yield increases. However with commodity bullish outlook, dollar debt yields will rally wide.
Standard Chartered Bank have tapped the emerging market earliest
Looks to me that the earliest bird catches the first worm. Standard Chartered Bank have set up a brokerage firm in Japan that will sell emerging markets assets to investors. They can be lauded for tapping into the emerging market curve earliest. Emerging markets have not only yield but growth on their side. Their currencies may be weak but returns are higher with the right compensatory premium for the sovereign risks they are exposed to. Africa and Asia the fastest growing continents today. Asia is in fact slowing down as Chinese economic engine overheats. Whichever investor looks to investing long term must extend their horizons to Africa.
The writer is a freelance commodities and debt analyst.