African Eurobonds suffer as commodity prices slump
African capital markets have been driven by a boom in Eurobond issue during the past two years, but supply and demand has come under fire after plummeting oil and commodity prices.
The past couple of years have seen the exponential growth in the African Eurobond market, but the collapse in global oil prices could halt the recent boom in issuance, and, according to bankers and economists, there should be added focus on differentiation among African dollar-denominated credits.
Excluding South Africa, there were 12, nine and 10 Eurobond issues from sub-Saharan Africa (SSA) in 2012, 2013 and 2014 respectively, according to Deologic. In 2012 and 2013, there were six corporate Eurobonds issued and only one in 2014. All were from Nigeria, which, outside of South Africa, has the deepest capital markets in the region.
“The rally that we saw influencing the asset class in Africa in the first part of 2014 probably won’t be repeated,” says Albin Kakou, fixed-income portfolio manager at Silk Invest. "Investors will need to take on a much more granular view on Africa to make savvy investments."
Angus Downie, head of research at Ecobank, adds: “In the middle of last year, the Africa Eurobond story was continuing to move forward, albeit with some headwinds. Fast-forward six months and the collapse in oil prices, investors are much more sceptical.
“The likelihood that new countries will come to the Eurobond market and the probability that we will see Africa countries and corporates re-issue has fallen.”
Since June, the price of Brent crude oil has more than halved, dipping below $50 per barrel in January – the lowest level since May 2009.
In response, leading oil exporters in Africa, in particular Nigeria, Gabon and Angola, have experienced weaker current accounts, budgetary stress and rising exchange-rate pressures. Yields on Eurobonds across SSA have risen.
Nigeria – where oil accounts for 95% of the country’s exports and 75% of government revenues – will see the greatest slump in activity. According to Bloomberg, the naira has depreciated 13% in the past three months, more than any other African currency, and since September 2014 yields on Nigeria’s 2023 Eurobond have increased by 220 basis points on the back of the falling oil prices.
Within the same time frame, yields on Gabon’s 2024 and Angola’s 2019 bonds have risen by 190bp and 290bp respectively. Non-oil exporters, such as Kenya, Cote d’Ivoire, Zambia and Senegal, have fared better with increases between 30bp and 150bp.
“After South Africa, Nigeria has the most active capital markets in the region and with the currency devaluating and with yields on the increase following the fall in the oil price, the likelihood that the country will go back to the debt capital markets is low,” says one African investment banker.
“And if rates start to pick up in the US in the second half of the year, there will be a dramatic impact on emerging-market yields and as a result, growth in emerging and frontier markets could dip. Debt-wise, there isn’t much to be optimistic about in the region this year and activity across the board will remain subdued over the next year.”
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Nigeria’s local currency debt markets will also be negatively affected, while the banking sector – which generally turns to the Eurobond market to facilitate domestic companies hoping to buy oil assets – will also see a slowdown in activity.
Last year, Zenith Bank, Access Bank, Diamond Bank, First Bank of Nigeria and Ecobank Nigeria raised $1.75 billion from the Eurobond market.
“Within the current context, there will be fewer deals done, so fewer Eurobonds issued from the banking sector,” says the investment banker.
Commodity price slump
Samir Gadio, head of Africa strategy at Standard Chartered, says: “Oil producers have sold off much more aggressively than oil importers as their sovereign credit profile deteriorated due to the collapse in the oil price. The only exception to the rule is Ghana [a net oil-importer] which is seen as the weakest sovereign in the region and has suffered from a less-supportive risk bias in the sub-Saharan Africa Eurobond space.”
Ghana’s political stability and diversified economy has been a pull factor for investors interested in the African growth story, but as the country continues to grapple with a twin deficit and a currency that has been free-falling since the end of 2013, investors have become wary of the country’s debt sustainability.
According to data compiled by Barclays, Ghana’s current-account deficit stands at 11.9%, while the budget deficit is 10.1% of GDP in 2013. In 2014, the cedi depreciated 33.6% against the dollar to around GHS3.2 in January.
As Francisco Ferreira, World Bank chief economist for Africa, says: “Ghana’s pre-existing fiscal problems have forced the government to seek help from the IMF, which is a good sign, and despite the risks there may still be a temptation by the government to issue another Eurobond to stem current-account and fiscal issues.
“There could be demand, at the right price, but servicing the debt may become more difficult. Ghana should move with caution.”
In Ghana, oil accounts for 1.3% of GDP, according to Bank of Ghana. The fall in oil hasn’t had as great an effect on the country’s trade balance and Eurobond yields. However, the price of gold, which represent 36% of total exports, has had a negative effect.
In 2014, gold prices collapsed 27.8% in 2013 before a slight increase of 0.2% in 2014. Iron ore prices fell by 47.8% in 2013 and 14.1% in 2014, while coca fared slightly better, with prices rising 16.6% in 2013 and 11.7% in 2014. Net commodities exporters, including Botswana, Niger and Namibia, have seen pressures on their current-account balances as a result.
“With the drop in oil prices, we have also seen weaker demand for many other commodities such as iron ore, which unfortunately hasn’t made the headlines as much as the plummeting oil price,” says Ecobank's Downie. "This in turn is affecting the country’s fiscal and current-account deficits, putting pressure on FX reserves, which in turn is increasing strains on the currency that is helping drive Eurobond yields up."