Domestic sub-Saharan African debt is back on the radar of emerging market investors, a strong sign of renewed willingness to swallow currency and political risks for double-digit returns.
However, the levels of foreign interest are far below the heady days of 2006-07 when just about any country on the poorest continent, no matter how chaotic its government or economy, was seen as a potential investment destination. “It was pretty much ‘throw a dart at a map and then ask, have they got a debt market?’” said Stuart Culverhouse of Exotix, a London brokerage specializing in Africa’s frontier markets — normally defined as anywhere apart from South Africa or countries on the Mediterranean coast.
“You would get questions about Sierra Leone or Mauritania — a very eclectic mix,” he said.
More realistic propositions then and now were Nigeria, the frontier region’s biggest economy, and Kenya, due to the presence in both of functioning secondary debt markets, albeit much less liquid than, say, South Africa.
However, Zambia, Mauritius, Uganda, Namibia and Ghana, the first sub-Saharan African nation excluding South Africa to issue an international bond, also pulled in foreign money — and are starting to do so again less than a year after being dumped in a headlong rush from emerging market assets.
Angola, which wants to issue $9 billion in debt this year, is another potential target as investors seek a slice of a country that has boomed since the end of civil war in 2002 and now rivals Nigeria as Africa’s number one oil producer.
“It was probably inevitable that some of that money would return. What’s surprising is it’s happened so quickly,” Culverhouse said. Levels of external interest in a continent expected to grow two percent this year are such that Brian Mugabe, head of Johannesburg-based broker Securities Africa, said he was thinking of starting a dedicated domestic African debt desk.
The roller-coaster ride of Ghana’s $750 million 10-year Eurobond, launched in September 2007 with a coupon of 8.5 percent, illustrates the cycle perfectly. The yield spiked above 23 percent in early December due to the global sell-off in emerging markets and concerns about an election-related fiscal blow-out.
Since then, it has fallen right back to around 9.5 percent — its level in September — amid renewed external appetite for emerging market exposure and signs of policy prudence from new President John Atta Mills.
“The yield on Ghana’s international bond has really come down massively,” said Antoon de Klerk, an emerging bonds fund analyst at Investec in Cape Town. “I don’t think international investors are quite there on the local side, but that’s always a first step: guys get into the Eurodollar bonds and then start asking questions about what’s happening on the domestic side.”
The “Egyptian carry trade” — a popular market shimmy in 2006-07 whereby investors borrow cheaply in dollars or euros to invest for returns of 10 percent or more in the relatively stable Egyptian pound — was back in play and other more exotic variations would inevitably follow, de Klerk said.
Apart from the risks of Africa’s erratic politics, or currencies that can yo-yo with world commodity prices, one of the biggest headaches for foreigners can be getting hold of local currency African debt in the first place.
Aside from Nigeria and Kenya, they will typically have to buy it at issue via a local bank and hold it until redemption; meaning shorter-term paper is often the only option.
Volumes are too small for major bond funds to get involved, but the returns on offer — especially when compared to rich country debt yielding less than 4 percent — can make it worthwhile for more specialist investors.
Ugandan five-year paper — the longest dated-issue available — was quoted with a yield of 14.3 percent on July 23 and a 10-year Tanzanian bond auctioned in July had a coupon yield of 15.48 percent. Although both countries’ currencies have depreciated by around 20 percent against the dollar over the past year, the Tanzanian shilling has been roughly stable for the past three months while Uganda’s shilling has gained around 10 percent.
