Big international appetite for African sovereign debt
THE APPETITE for African sovereign debt in the international capital market is growing. And Africa itself is salivating for more. The conditions favour Africa. The continent needs money to finance its development programme. Investors on the other hand are looking to diversify their portfolio. The result is a high demand for Africa’s sovereign debt. Consequently, this year, the international capital market could witness some huge issues by African governments.
Data available to this publication shows that All sovereign debt issued by African governments in the last two years was oversubscribed.in 2011 and 2012 a number of sub-Saharan African countries have issued debt worth more US$2.2 billion-and all of it was oversubscribed.
Namibia, Nigeria and Senegal raised US$500million by issuing sovereign debt in the international capital market in 2011. Last year Zambia raised some US$750 million. The debt was subscribed at US11.9 billion forcing the country to up its uptake to $750 million from the initial $500 million. All borrowed at 5.5 per cent or thereabouts which is considered cheap.
This year even larger issues are expected. There reports that Kenya could issue a US$1 billion 10-year-Eurobond to finance its infrastructure expansion. Despite what are deemed political uncertainties, this being an election year, Kenya’s debt is expected in the market perhaps soon after the election on March 4th. Nigeria has also announced her intention to issue a US$1 billion Eurobond to finance the energy sector. Others considering throwing their hat in the ring are Angola, Tanzania, Rwanda, Uganda and Mozambique.
Why has Africa become the darling of investors? Good house-keeping and robust economic growth in the half of the decade of 2010 has changed the perception of Africa risk. Also discovery of hydrocarbons and other natural resources is raising the investing profile and mitigating the risk profile.
Consequently, investors are snapping up African debt paper as returns are still better than in Europe. The rise in debt issuance by African countries is underpinned by relatively high risk-adjusted yields. Global investors inclined to diversify their asset portfolio are attracted by favourable yields offered by African assets, discounting the risk of low ratings for many of these countries.
Africa, according to experts, experiences a financing deficit of US$30 billion needed to finance infrastructure. Its annual requirement is US$90 billion out of which Africa raises US$60 billion from its resources. Given that sovereign debts are relative long-term in nature, governments are borrowing to bridge the gap.
In the West, there is a huge pool of cash created by quantitative easing that has increased the flow of funds to emerging and frontier primary bond markets, fuelling a record inflow of capital to these regions.