Kudzanai Sharara Taking Stock
There is a new wave of external borrowing by African governments, and it is not from Development Banks. Given the prevailing low interest rates in developed countries, African countries, looking to borrow money on international private markets, are increasingly turning to the issuance of sovereign bonds as the instrument of choice to finance long term projects.
Most African countries are in definite need for large investments in programmes and projects that support development. Because of limited resources and budget deficits, African governments rely on borrowing to pay for infrastructure projects in order to address growth and poverty reduction in the long term.
As a result, African countries have been using Eurobonds to finance their budgetary deficits, as well as fund development projects such as power generation, road and rail infrastructure among others.
Not only do these bonds allow governments to raise money for development projects when domestic resources are wanting, but they also act as a means of diversifying sources of investment finance and moving away from traditional multilateral financial institutions such as the IMF and the World Bank. Unlike loans from the IMF, bond issuances come with fewer strings attached with governments having a say on where they channel the money.
Increased borrowing activity, by the African issuers, is also providing the lenders with an opportunity to diversify their portfolios.
Global investors have recognised the potential for high returns offered by African countries and have been eager to purchase the issued bonds for higher yields amid low returns in home markets.
Most of the bond issues to date have been oversubscribed with Zambia being a good example.
In September 2012, Zambia’s 10-year bond issuance was oversubscribed more than 15 times and led Zambia to increase the initially planned amount of $500 million to $750 million, with the excess funding allocated to additional investment projects.
Just this month, Senegal became the continent’s fourth sovereign in succession to attract $10 billion or more of orders when it sold $2,2 billion of euro- and dollar-denominated securities.
Given the success rate attained by most issuers, more countries are lining up with sovereign debts.
South Africa has budgeted to raise $3 billion in international markets in the fiscal year starting April 1, 2018.
Other countries looking at taking advantage of the strong appetite for African yields include Ghana, Ivory Coast, Angola, Tanzania, Kenya and Nigeria. Since the beginning of the year, African sovereigns have already sold $10,7 billion of Eurobonds, more than half the record $18 billion they managed last year and above what was raised the whole of 2016.
Zimbabwe is missing out
Sadly, as much as Zimbabwe is also in need of such capital, it is set to miss out on the seemingly booming bond market. Apart from the country’s huge debt overhang, which has put new capital at bay, the country does not even have a sovereign rating, the first step for a bond issue.
Without an established sovereign risk, there is no benchmark for corporate issuers to come to the market and support a bond issue by Zimbabwe, even if the country wanted to. A rating speaks to a country’s credit worthiness, and sadly Zimbabwe is not even rated.
Eurobonds are denominated in US dollars which means that the borrowed funds could lead to pressure on the country’s foreign reserves when payments are due.
Apart from debt arrears, Zimbabwe is already struggling to pay for its day to day requirements. Borrowing in a foreign currency puts borrowers at a disadvantage, especially when the borrowing country has no reliable revenue streams in the borrowed foreign currency.
Zimbabwe does not have enough foreign reserves to guarantee debt repayments. The country largely depends on exports of primary commodities which makes its earnings vulnerable to low international commodity prices.
There are a few other reasons that would make any bond issuance by Zimbabwe unattractive to investors. Fiscal irresponsibility could pause as a red flag to investors as it limits chances for setting aside reserves for bond repayments.
Lack of reliable statistics and transparency, as well as poor history of debt management also limit chances of a successful bond issuance by the country.
While Zimbabwe is highly constrained to be able to issue a sovereign bond in the near future, the current bond market boom will not last forever. If the low-interest-rate environment in developed markets change, it could reduce investors’ appetite for African sovereign bonds.
The normalisation of monetary policy in advanced countries is likely to affect appetite for sovereign bonds in the continent.
The Federal Reserve has already embarked on that journey of putting up interest rates — signalling a possible end to the bond buying spree — before Zimbabwe can enjoy the benefits.
As it did with the commodities boom as well as the scramble for Africa, Zimbabwe risk missing out on the latest wave.