More African Eurobonds expected this year
|Logistical Infrastructure need massive funds|
KENYA'S US$2 BILLION Eurobond was oversubscribed by 500 per cent by the close of offer. The Bond, Africa’s largest sovereign bond so far is likely to lead to a stampede on the Eurobond issues in Africa.
It was in many respects a pathfinder for other budding bond issuers. A number of African countries are said to be considering floating Eurobond of their own but waited to see the response on the Kenya bond which was considered ambitious.
However, the over subscription is a morale booster that could see other intending issuers up their offer. Kenya herself has indicated that she will be back in the market with another sovereign Bond, next year. This time around she will be targeting the interest-free Islamic bond.
To date, the highest African sovereign Bond is the US$750 million Zambian Bond issued in 2011. Initially the bond was meant to raise US$500 million but it was oversubscribed by 238 times at $11.9 billion. Zambia therefore accepted to $750 million.
Nigeria, Angola, Tanzania, Uganda and Mozambique are said to have been toying with the idea of floating a Eurobond worth more than US$1 billion but were held back by uncertainty about market response. They are now expected to hit the road with gusto.
So far Africa has borrowed more than US$2.6 billion in Sovereign Bonds since 2011. Kenya’s sovereign bond, which amounts to 77 per cent of all bonds- borrowing in Africa so far, is expected to provide the answers to such uncertainties.
The appetite for African sovereign debt in the international capital market is growing. And Africa itself is salivating for more. The conditions favour Africa: Interest rates in the U.S. and Europe are low and unlikely to rise soon. This means that investors have to look elsewhere to better returns. For Africa, it is time to obtain low-cost funding before the global economic recovery brings an end to stimulus that drove gains in emerging-market debt.
The continent needs money to finance its development programme. In addition, to financing projects and completing them in time and on budget, local currencies gain while interest rates in the domestic market will decline. Low interest rates buoy domestic economy by encouraging more borrowing by the private sector leading to further growth.
Given the prevailing circumstances for investors, the best destination for their funds is Africa. The result is a high demand for Africa’s sovereign debt. Consequently, this year, the international capital market is expected to raise more funds for Africa.
Why has Africa become the darling of investors? Good house-keeping and robust economic growth in the second- half of the decade of 2010 has changed the perception of Africa risk. Also the 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 the West. 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 needs the foreign money to finance its development programs, especially in infrastructure. According to experts, Africa 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 long-term in nature, governments are borrowing to bridge the gap.