Africa debt: Ethiopia tops off banner year for sovereigns
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Africa debt: Ethiopia tops off banner year for sovereigns

African DCM becoming more sophisticated; debt sustainability a concern.

Africa’s Eurobond market closed 2014 on a high, following soaring investor demand for Ethiopia’s debut offering. The $1 billion 10-year debut Eurobond, which was priced at 6.625% over 10 years, boasted $2.6 billion in orders.

“The order book was of the highest quality, with fund managers taking up 96% of the bond. It was a tremendous inaugural transaction to end the year with,” says Maryam Khosrowshahi, head of public sector coverage CEEMEA at Deutsche Bank who worked on the deal.

Some 50% of the bond was taken up by fund managers in the US, 35% from the UK and 14% from the rest of Europe. Deutsche Bank and JPMorgan were the lead managers and Lazard advised the Ethiopian government.

The money raised from Ethiopia’s deal will finance a variety of programmes in the country, including projects in the health, education, sugar and energy sectors, as well as the development of economic zones in the country, says Khosrowshahi.

Ethiopia’s successful debut follows Kenya’s debut Eurobond in June, Côte d’Ivoire’s return to the debt capital markets in July – three years after the sovereign defaulted on its 2032 Eurobond – and returns to the market by Ghana and Zambia, among others.

According to Dealogic, there have been nine sovereign Eurobonds from Africa this year worth $8.5 billion. This was marginally less than 2013 which saw 10 deals completed at $10.7 billion.

“We should continue to see issuance from the continent next year,” says Khosrowshahi. “African sovereigns with strong economic performance and prospects should be able to garner investor interest and support once the backdrop is more constructive in the New Year.”

Nicholas Samara, vice-president of CEEMEA DCM at Citi says: “I’m not sure we will see such high volumes in 2015 because large chunks of debt were issued from Africa in 2014. But what we should note is that sub-Saharan Africa is becoming more sophisticated in terms of the development of the capital markets.”

Samara adds: “Kenya’s issue earlier this year is a great example. The $2 billion Eurobond was spread over two tranches and six months later, the government re-opened the sovereign bond to raise an additional $750 million. This is something that has never happened in sub-Saharan Africa outside of South Africa before.” 

Ethiopia’s success comes despite a challenging backdrop. Plummeting oil pricesthis year have put pressure on commodity exporters in Africa such as Nigeria, Gabon and Angola and pushed up rates for some African securities in the secondary market. Nigerian borrowing costs are now higher than Kenya, Rwanda, Senegal and Ivory Coast, despite the fact that they all have lower credit ratings than Nigeria.

amelie roux, fitch
The falling oil price may actually be beneficial for Ethiopia as 20% of the country’s imports of goods is purely spent on fuel – quite a substantial amount. Lower global oil prices may help to plug the current account deficit

Amelie Roux, Fitch Ratings

“The falling oil price may actually be beneficial for Ethiopia as 20% of the country’s imports of goods is purely spent on fuel – quite a substantial amount. Lower global oil prices may help to plug the current account deficit,” says Amelie Roux, analyst at Fitch Ratings based in Paris.

Ethiopia’s current account deficit widened to 8.6% of GDP in 2014 from 5.9% a year earlier.

Investors were drawn to Ethiopia’s debut as a diversification play away from oil, says Khosrowshahi, as Ethiopia’s economy is driven by the agriculture, industry and service sectors.

“What is also important to note, however, is that the plummeting oil price has affected secondary bond trading for all countries with links to oil,” she says. “While Africa is the last frontier, the last emerging market region which investors can expect to benefit from real growth, the region is also becoming more and more integrated into the global capital markets landscape. It’s a good sign.”

Debt sustainability, however, may be an issue, with FX reserves in Ethiopia covering less than two months of exports. “This is low in absolute terms and low in comparison to Ethiopia’s peers. To manage this will be difficult and the government will need to make structural changes to the economy to change this,” says Roux.

But as Khosrowshahi says: “Debt to GDP levels in Ethiopia are low. Central government debt to GDP is 22%. Public sector debt to GDP is 46%. The country has had strong GDP growth over a number of years, and significant focused investment in social, infrastructure, and industrial development should contribute to maintaining similar economic expansion in the years to come.”

“While FX reserves are low, investing in tertiary sectors will help with debt sustainability. Debt to GDP levels in Ethiopia are lower today than they were in the last decade following the debt relief package by the IMF. There aren’t that many countries in Africa with such good metrics,” says Samara.

GDP growth for Ethiopia has averaged 10.9% between 2004 and 2013 compared to a regional average of 5.3%, according to the World Bank.

But Ethiopia has long been closed off to foreign investment, with the banking and telecoms sectors kept exclusively for locals, and the public investment effort has been financed by domestic credit, bilateral loans – usually from Chinese lenders – or concessional loans from the World Bank.

“Ethiopia has exhausted these avenues. For instance, domestic credit is not enough to fuel the country’s huge infrastructure needs: The country’s stock of domestic credit is around 30% of GDP, not that low, but not enough for what the country needs,” says Roux.

“The Eurobond issue is an indicator that the country is looking for alternative sources of funding and highlights the country’s need for dollar funding in particular.  It may also be an indication that the country is starting to open up to international investors more generally,” she says.

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