Qatar the gulf giant, issued a record $9billion in dollar bonds in May. This international capital market appearance was x2.3 times oversubscribed with $23billion in book orders. The only time on my clock I witnessed such an overwhelming appetite for debt was in 2012 when Africa’s second largest copper producer Zambia made a $750million debut. This one was 24x times oversubscribed with book orders of $12billion. We occasionally joked with a colleague why the Southern Africa nation didn’t just borrow enough to meet its long term infrastructural obligations because pricing was relatively low. Zambia paid 5.25% which is the lowest an African nation has ever paid for that level of sovereign risk save South Africa. South Africa sold $1.25billion at 350bps above similar 10yr U.S treasury. Kenya, Ivory Coast, Ghana and Angola followed suit. One striking feature about the timing of these issues was that it was at a time Europe was in recession. A time when there’s a scramble for emerging market assets. I prefer to call them African assets.
Middle East nations are now exporters of dollar debt replacing crude.
Saudi Arabia and Kuwait also intend to sell bonds in this fiscal year emulating Qatar the 2022 World Cup soccer tournament hosts. They needed the funds to boost infrastructure as well as plug a budget deficit which was created by an almost 70% slide in crude prices. The plummet in oil prices has widened the gulf nations budget deficits that has forced these oil giants to resort to selling debt to plug the hemorrhage. African nations affected are Nigeria and Angola whose currencies have devalued significantly. Gulf nations have had to diversify operations through privatization of most state owned entities. The cost of use of sovereign wealth funds to manage currency stability has been high.
Translation of the Qatar bond sale over subscription.
Twenty three billion dollars ($23billion) in book orders with $9billion in bonds sold means the markets are awash funds. This should be used as an indicator of demand for yield. At the time this bond was being sold, yields on debt were low pre Brexit. Today US treasury is fetching record low of 1.35% with parts of Europe generating negative yields. Bonds were deemed safe havens but clearly not. Investors have rushed to gold and silver as safer haven assets. It is for this reason that the precious metals are trading at record 2 year highs.
“Negative yields will be around for a while,” Professor Burton Malkiel author of A Random Walk Down Wall Street said yesterday on a Bloomberg news interview. The reason why European stocks are cheapest to Americans is because of the weakening Sterling, he said.
Much as we are living in a time when yield is low to negative yet equities are at record attractive caps, there’s one area most are paying a blind eye to. That place is emerging markets. I am made to believe yield is hiding in Africa. Where on earth today can one get returns of between 20%-29% offering growth rates of 6%-10% at a time the worlds economic engines are cooling? Opportunities for hydro, solar, nuclear and thermal energy generation are golden in Africa today. Standard Chartered yesterday announced the setting up of a brokerage wing in Japan. This is a genius and strategic move to search for yield in emerging market assets.
African dollar debt pricing to edge lower to single digit
A few weeks ago Ghana was on a road show to test the international debt market waters for a possible billion dollar issue. Indicative pricing on a dollar sale was double digit between 12%-13%, a level justified by a premium cover to investors for the current level of risk (double digit inflation) the cocoa producing west African nation is exposed to. Kenya is replicating a similar approach to test waters. The argument I am raising is that with volatility in Europe and stunted global growth, investment in emerging market economies is the best decision investors can take. The global markets are awash funds and searching for yield. I project dollar debt sales even as low as 7%, similar levels bonds sold for in 2012. Pricing in this era will be driven by willingness of sovereigns to issue paper more than anything. Suffice to say investors will skew more towards price taking than price making. It’s a take it or leave it gamble. My bet is if Ghana did another road show, investors would accept its paper at a few basis points lower. Nations like Kenya with bullish fundamentals could get away with 6.5%-7%. The debt market fundamentals are spontaneous to explain why Ivory Coast coming from war sold bonds at more attractive yields than Kenya east Africa’s economic power hub. African bond sellers can pick a leaf from Qatar issue on usage of more arrangers on deals. It just widens client access and markets the debt issue better. Qatar used 10 investment banks to help sell its $9 yards debt.
Could this window be used to snub IMF financial assistance.
It’s as if Angola saw this coming, they are in talks with Gemcorp Capital LLP for $500million in dollar loan. This came a week after Dos Santos called off discussions with the IMF over financial support. African nations may opt to sell dollar debt cheaply than strangle themselves with an IMF rope which comes with stringent benchmarks. Many countries are in talks with the IMF to include Zambia and Mozambique. The general sense is that there’s inertia to accept financial assistance on account of the rigorous conditionality’s the package comes with. I’m poised to believe whichever nation strikes while the iron is hot will finance its deficits cheaply. They will not only achieve cheap finance but likely avoid the IMF route.
Africa needs to market itself more for visibility
A step Africa needs to take seriously more is product marketing. More visibility is required to deepen its trading playing field. Investors need to know that there is somewhere on the planet where opportunities are vast. That there is a haven for their idle funds. Sub Saharan growth forecast could have been revised lower to 3.3% but this is far higher than most saturated markets. Will bullish forecasts on commodities by Citigroup, surely investors thinking should be triggered to think Africa. I doubt if the likes of Barclays London will be going ahead with offloading the remaining 35% stake in Barclays Africa. Private equity firms like Atlas Mara are one of the few that got it right about Africa.
I remember Bob Diamonds response to a question on commodity price turbulence in Africa.
“Asset valuations are at their lowest which is the right time to buy,” the former Barclays CEO said.
Atlas Mara recently concluded purchase of growth into the African banking industry in Zambia’s largest M&A deal in which BancABC and Finance Bank merged. The new entity will be the southern African nations 5th largest bank by asset size. Atlas Mara has stake in 8 banks in total in Africa spanning from Botswana to Malawi. Private Atlas Mara and Carlyle of the US are bidding for stake in Barclays Africa.
Much as they say markets never get it wrong. The markets are awash funds and searching for yield which currently attractive in Africa.
The writer is an Economist and Bonds trader on an African trading desk.