When Ghana became the first west African nation to enter the international bond markets a decade ago this month, it was part of a flurry of debt-raising in the world’s least developed region.
Now the bills are coming due, with nearly $25bn of sovereign debt set to mature in the region next year according to an FT analysis of Thomson Reuters data.
Investors’ rush into emerging market debt since the start of this year should be a boon for African finance ministers seeking to refinance — sub-Saharan country debt with a total return of 10.9 per cent has outperformed the EM average of 9.1 per cent so far this year, according to Bloomberg data.
But the big question for investors and finance ministers is whether the current bullish market conditions will hold for the coming wave of new debt sales.
Since the start of this year sub-Saharan African debt has “put in a stellar performance”, says Sergey Dergachev, senior portfolio manager at Union Investments. “The question is whether this [rush for yield] is fundamentally justified.”
A cause for concern is that the region’s economy is still fragile, feeling the repercussions of the mid-decade slump in oil and commodity prices. Beyond the striking price performance in regional bonds so far this year, concerns over high debt levels and credit risk resonate.
Credit rating agency Moody’s has seven of the 19 sub-Saharan African sovereigns that it rates on negative watch — the highest proportion of any world region — and has downgraded four countries since the start of the year.
“Despite the improving global macroeconomic environment, it is still fair to say that the risks in sub-Saharan Africa are to the downside — not for all sovereigns but in particular for those which are notably dependent on commodities prices,” says Lucie Villa, a senior analyst at Moody’s who specialises in the region.
The level of risk is “unevenly spread across the region”, she says. “There are countries that have certainly benefited from the global macro outlook improving, but low commodities prices are causing a drag on the economic and fiscal outlook for some.”
Two countries -— Mozambique and Republic of the Congo — have defaulted on debt this year. The latter was the result of a payment to investors being blocked by a US court, whereas Mozambique faces a more fundamental struggle with excessive indebtedness after a misappropriation scandal.
Graham Stock, head of emerging markets sovereign research at BlueBay Asset Management says that while the general macro outlook for the region is positive, investors are failing to do their credit homework.
“We are wary of smaller economies where dollar-denominated debt is a big burden for the budget, [where] I don’t think the pricing reflects enough reward.”
This is because yields have been falling since the start of the year as investors pile in, some of whom have not fully appreciated the risk they are taking on, he argues: “We have seen yields moving lower and some of that is because of indiscriminate allocation by ETFs, and also the grab for yield in emerging markets globally. This makes it all the more important to differentiate.”
Past experience has proved that in small, thinly traded markets, a rosy mood can quickly turn sour and then opportunities for investors to sell out become limited, Mr Stock warns: “In 2008 and during the taper tantrum in 2013 there just wasn’t an exit door for investors who had not done their fundamental analysis.”
Mr Dergachev echoes his concerns:
Credit risk is “quite persistent — look at what happened with the Mozambique default, and the Congo missing a payment” — so potential investors eyeing sub-Saharan African yields “have to bear in mind that Africa is not a risk-free asset”.
Perhaps some have forgotten this, he suggests: “Investors should differentiate between credits a lot, but the market is not differentiating at the moment.”
Mr Dergachev is positive about Rwanda, Ethiopia, Ghana and Zambia, and negative on Mozambique, Gabon and Angola.
Mr Stock is keen on Nigeria, Cote d’Ivoire and Kenya, and wary of Mozambique, Ethiopia and Angola.
Ms Villa suggests that warning signs investors should watch for across the continent when contemplating buying into a sovereign bond are poor infrastructure, which poses a structural impediment to economic growth, along with “particularly low institutional strength and large external foreign-currency debt”.
“For those sovereigns, the credit risk or stress is to some extent independent of how quickly the economy is growing,” she says. “If you have a very high stock of debt to pay, or large deficits to finance, your growth rate is not going to help you that much.”
With a substantial proportion of that debt stock set to mature in the coming years, the markets’ appetite for some of the riskiest sovereign debt on the planet is set to be tested.