By Gregory Smith – Fixed Income Strategist for Emerging Markets
First, record issuance in 2018. Despite talk about the debut issuance from the continent in 2012-14, the recent wave of issuance has been larger. A huge African Eurobond issuance in quarter 1 2018 continued in the second quarter. By the end of May, 2018 became a record year with USD21.8billion in bonds issued, compared with USD19.4 billion in 2017.
In April and May 2018: Egypt, Angola, South Africa and Ghana all issued Eurobonds. There was no issuance in June as market sentiment deteriorated further (and most African countries had already realised their issuance plans for the year).
Nonetheless, African countries’ Eurobonds remain a small part of the frontier and emerging market bond space. For example, in April 2018 Saudi Arabia and Qatar issued Eurobonds with a combined total of USD23billion.
Second, the prices of Africa countries’ Eurobonds were hit hard. A stronger US dollar (it rallied from mid-April to end-June) and higher returns on US bonds (the 10-year breached 3% in May 2018) reduced appetite for investing in emerging markets. Added to this, were worries about USA-China trade relations. This resulted in outflows from emerging market funds and downward pressure on bond prices, including African countries’ Eurobonds.
Outflows also prompted investors to reassess risks. Eurobonds performed worse where markets perceived vulnerabilities to be largest (for example in Turkey, Argentina and Zambia). Bond indexes compiled by JP Morgan (that track bond performance across emerging markets) declined during the first half of 2018. Their emerging market hard currency bond index lost 4.1%. All African Eurobonds (issued prior to the start of the year) decreased in price in the first half of 2018.
Third, longer-dated Eurobonds. The themes of quarter 1 –including longer dated bonds and issuance in Euros—continued in quarter 2. Each of the quarter 2 issuers came to the markets with a two-tranche issue: Egypt (EUR2billion; split between 8yr and 12yr paper); Angola (USD3billion; 10yr and 30yr), Ghana (USD2billion; 11yr and 31yr), and South Africa (USD2billion; 12yr and 30yr). In 2012 when the African Eurobond story gained momentum, it was thought that African countries with lower credit ratings could not issue Eurobonds over 10yrs in length. Ghana paved the way with a 15yr bond in 2015 (with a World Bank guarantee) and then Nigeria cemented the idea with 15yr and 30yr Eurobonds in 2017. This myth has been truly broken in 2018.
Longer maturities are vital for the issuing countries. Ten (10) years is often not long enough for an economy to grow sufficiently and repay the debt, especially if economic expansion is interrupted by an external shock (for example a reduction in commodity prices). Over 15-30 years it is more likely investment associated with the borrowing will enhance GDP growth.
Egypt came back to the markets for a second time (they issued USD4 billion in February). In April 2018 they issued EUR2billion (8yr and 12yr paper). They have issued 29% of the African total so far in 2018.
Angola priced USD3billion on 9th May 2018 as the markets got weaker, but they were able to issue 10yr and 30yr paper. These bonds have performed better than other Eurobonds issued in 2018 on the back of higher oil prices and a positive narrative about reform and combating corruption.
Ghana had plans to issue in the quarter 1 but waited until they had secured a positive review of their IMF program at the end of April. Ghanaian officials were on their roadshow in a tough week for emerging markets. Luckily for Ghana, the market deterioration took a brief paused on the day they priced their Eurobonds. Despite the market turmoil they got a reasonable deal (the coupon on the 2029 paper is 7.63%) including on some long-dated paper (the coupon on the 2049 paper is 8.63%). Their recent story of reform and economic growth helped them access this financing after a period of more expensive borrowing in 2015 and 2016.
South Africa came to the markets for USD2billion (12yr and 30yr paper), raising the stock of their outstanding Eurobonds to USD19billion, approximately 24% of outstanding sovereign Eurobonds from the continent.
Zambia has seen very little change to its economic fundamentals in 2018 but their Eurobonds have been hit hardest. The risks of no IMF support should have been priced-in from July 2017 (when it became clearer that an IMF program would not be signed). Instead the prices of their bonds increased in 2017 as emerging market bond funds recorded inflows. It took the EM wobble from April 2018 to un-nerve investors and dramatic re-pricing followed. Zambia’s key risks are insufficient foreign exchange reserves to buffer an economic shock and the Zambian government’s complacency about its rapid debt accumulation.
This is not investment advice but for informational purposes.