African eurobonds 3Q19 update

The now $109.1bn African sovereign eurobond space has been growing rapidly. 21 African countries have issued sovereign eurobonds in US$ and euros, with maturities of up to 30-years. From the continent, South Africa and Tunisia issued sovereign eurobonds in 3Q19. The narrative has recently shifted from only issuance to include a growing track-record of eurobond repayment alongside efforts to reduce refinancing risk. However, African countries' debt levels are increasing faster than in other frontier markets.

African eurobonds saw mixed performance in 3Q19 after a strong rebound in the first half of 2019 from a tough 2018. Here is an update from the third quarter of 2019. 

Third quarter 2019 eurobond issuance

• 3Q19 saw sovereign eurobond issuance from Tunisia and South Africa. Egypt, Benin, Kenya and Ghana issued in the first half of 2019. Taking 2019 issuance to date to $17.7bn (including $14.1bn and EUR3.2bn of paper). 2019 is already the second largest issuance year on record for African sovereign eurobonds.
• Tunisia came to the markets in mid-July for EUR 700mn due in 2026. The borrowing was more expensive (with a coupon of 6.38%) than when they last issued (a similar amount of 7-year euro was issued in February 2017 with a coupon of 5.63%).
• South Africa issued a twin-tranche $5bn eurobond issue at the end of September (with $2bn of eurobonds maturing in 2029 and $3bn in 2049). Better market sentiment helped South Africa secure a lower cost of borrowing. For example, the September 2019 issued 30-year paper has a coupon of 5.75%, versus a 6.30% coupon on the 30-year eurobonds issued in May 2018.
• No eurobonds matured in full in 3Q19, although Kenya and South Africa had paid back eurobonds in the first half of 2019. 11 African countries have now paid back sovereign eurobonds.

Third quarter 2019 eurobond performance

African eurobonds performed very well in the first half of 2019, almost across the board, as investor sentiment recovered from a tough 2018. 3Q19 performance was more mixed.

• Markets were favourable for emerging markets in 3Q19 in some respects, and bad in others. Favourable factors included two (25bpt) rate cuts by the Federal Reserve and the yield of US 10-year treasuries ended the quarter at around 1.7%, down from just over 2.0% at the start.
• Investors have been bullish about emerging market economies in 2019 and bond funds have received a net increase in funds. There were some outflows in August but overall in 3Q19 asset managers received additional funds to invest in emerging market bonds.
• Nonetheless, a collapse of Argentine eurobond prices in August hurt investors and that led to some contagion effects hitting sentiment for African eurobonds, especially those with long duration. The China-USA trade war also continued to provide uncertainty.
• Oil prices (Brent Crude) started the quarter at around $65/bbl and ended it at around $62/bbl. This compares to a drop of $5/bbl in 2Q19, and an increase of $14/bbl in 1Q19.
• The average cost of African eurobond borrowing remained static in 3Q19. At the end of 3Q19, average yields of African eurobonds were approximately 6.1% (the same level as they started the quarter). In the first half of 2019 average yields fell (150bpts) from around 7.6% at the start of 2019.
• Some countries performed better than others. Rwanda, Cameroon, Morocco and South Africa did best with average yields dropping slightly (as prices for their eurobonds increased). Tunisia, Angola, Egypt, Ghana, Kenya, Namibia and Nigeria all saw their average yields (and cost of borrowing) increase.
• The average additional premium gained for investing in African eurobonds above assets deemed to be safer (US issued bonds) increased (50bpts) in 3Q19 from 4.4% points of yield to 4.9% points. This is possible when average yields of African eurobonds remained static because US Treasury bond yields fell.

Third quarter 2019 snippets

• Rwanda performed best in 3Q19. The price of Rwanda’s only eurobond ($400mn maturing in 2023) increased (and the yield fell 47bpts), a move supported by their credit rating upgrade by S&P on 9 August (from B to B+).
• Negative bond yields in many European countries boosted appetite for investment grade African debt from Morocco, and South Africa (who still have one investment grade credit rating left).
• Ethiopia’s sole eurobond ($1bn due in 2024) yield remained fairly flat during the quarter versus peers. Although late in the quarter Moody’s shifted the outlook on their B1 rating to negative, as their concerns over state enterprise external debt heightened.
• Egypt eurobonds traded flat for most of 3Q19 after a strong first half of year. But the bonds prices fell a little at the end of September following anti-government protests in major cities.
• Confidence in Angola’s IMF supported reforms has ebbed a little bit in 3Q19, with average eurobond yields increasing 45bpts to 7.8% despite oil prices gaining a little. Angola has 3 eurobonds due in 2025, 2028 and 2048 with a combined value of $5bn. Fitch dropped the outlook on its B rating of Angola from stable to negative in 3Q19.
• Tunisia saw its average eurobond yield increase 67bpts to 7.31% as political uncertainty increased in 3Q19. Following the death of the President the national elections were brought forward to September 15. But the government still managed to issue a new eurobond in July.
• Zambia continues to stand out in the Africa space with the weakest trading eurobonds. Each of their 3 eurobonds are priced around 70 US cents on the dollar as investors see an increasing risk of default and fear they will not be repaid in full. Zambia’s credit rating was downgraded by S&P from B- to CCC+, following downgrades by Fitch in June and Moody’s in May.
• Republic of Congo signed an IMF program, after a long wait, in July 2019. Having re-profiled its Chinese debt portfolio and continued ‘good faith’ negotiations with commodity traders that have provided oil-backed loans.
• Moody’s upgraded Mozambique’s credit rating to Caa2 because they thought that the eurobond (currently in default following coupons not being paid since January 2017) might soon be (generously) exchanged for a new one with bond-holding investors.
• Niger was provided a new rating by Moody’s of B3. There are now 10 African countries with credit ratings and without having issued eurobonds.

For more frequent updates follow the author on Twitter.

Other African eurobond updates from the same author: 2Q19 update, 1Q19 update and 2018 summary.

Link here to an article on Chinese overseas lending.

Link here to an article on the success and changing nature of IMF bailouts.

This is not investment advice. It is just for information.