Eurobonds

Earlier this week, Nigeria successfully issued three tranches of Eurobonds on the international capital markets, its first such operation since November 2018. While the country had planned to raise between $3bn and $6.2bn, the order book peaked at a whopping $12.2bn, enabling the government to settle for a healthy $4bn from foreign investors. The issuance successfully attracted bids from Europe, the Americas and Asia and was also open to domestic investors. Nigeria now has an extra $4bn split into three tranches: a 7-year tenor Eurobond at 6.125% for $1.25bn, another 12-year tenor Eurobond at 7.375% for $1.5bn and finally a 30-year tenor Eurobond at 8.25% for $1.25bn. While the rates secured by Nigeria are not as attractive as some of its neighbours (Côte d’Ivoire and Benin recently closed Eurobonds issuances at only 4.3% and 4.875%), the operation certainly confirm investors’ appetite for Nigerian debt. Nigeria is rated B2 (negative) by Moody’s, B- (Stable) by S&P and B (Stable) by Fitch. The country is in the middle of a historic foreign exchange and currency crisis, so the influx of additional dollars is expected to help its central bank provide much-needed foreign exchange to the economy. While the proceeds from the Eurobonds are to be used to partly finance the 2021 deficit, an inflow of foreign exchange is also good to increase external reserves and help support the Naira’s exchange rate. The country’s external liquid reserves have been back above the $35bn threshold since mid-September, a level not achieved since last February. While Nigeria has struggled to increase oil production, strong commodity prices still helped the country’s oil exports revenue hit a 3-year high in Q2 2021. Nigeria’s oil & gas exports currently represent 89% of the country’s total export revenues including 80% of crude oil and 8.5% for LNG. The country now has the option of selling more debt: its issuance confirmed the willingness of investors to provide capital and possibly reach the maximum target of $6.2bn Nigeria had set. In an emailed response to Bloomberg this week, Debt Management Office Director General Patience Oniha said Nigeria might seek to raise the full $6.2bn from Eurobonds if the tenors and pricing are good.

by Misheck Mutize Post Doctoral Researcher, Graduate School of Business (GSB), University of Cape Town International financial markets have opened a window for African governments to diversify their funding sources from traditional multilateral institutions and foreign aid. For example, they can now borrow through issuing Eurobonds – these are international bonds issued by a country in a foreign currency, usually in US dollars and euros. South Africa was the first to issue Eurobonds in 1995. To date, 21 African countries have sold Eurobonds worth a combined total of over US$155 billion on international bond markets since 2006, when Seychelles become the second African country to join the Eurobond market. There is appetite for more. Eurobonds borrowing is done through commercial terms. The interest rates, term of bond and coupon payments are determined by market conditions. Because of poor credit ratings and perceptions of high risk, African bonds are classified as high yields. They’re risky, but they offer high returns. Investors are still scrambling for Africa’s high yield bonds. Eurobonds are costly for governments. The high yields demanded by investors means high interest cost to governments. But they are attractive to governments because investors buy them without preconditions. Unlike multilateral concessionary loans that come with policy adjustment conditionalities, governments have total discretion in how to use the proceeds. They are, however, offered at high interest rates, high coupon payments and shorter debt maturities. This means the government has a shorter period to use the costly funds and will also be paying periodic interest. The average tenor for Africa’s bonds is 10 years, with interest of 5% to 16%. This is unsustainable and has already led to more fiscal strain. Interest repayment is the highest expenditure portion and remains the fastest growth expenditure in sub-Saharan Africa’s fiscal budgets. For example Kenya, Angola, Egypt and Ghana are paying 20%, 25%, 33% and 37% of their collected tax revenue towards interest repayments. Investors are not interested in Eurobonds issued by other regions because they offer very low interest rates. Flavour of the last five years The Eurobond rush spiked in 2017, when US$18 billion bonds were issued in one year. By the end of 2019, the outstanding Eurobonds on the continent were totalling US$115 billion. Over the past two years, 10 countries have issued bonds totalling US$19.8 billion. It would have been more without the outbreak of the COVID-19 pandemic, which priced out issuers. Ghana and Egypt sold a combined US$7.1 billion while Morocco issued €2.5 billion in 2020 to support their fiscal budgets. Ghana and Egypt returned to the market, issuing a total of US$7 billion in the first half of 2021. Their debt-to-GDP ratios have now risen to 78% in Ghana and 90% in Egypt. Kenya also joined to issue US$1 billion, pushing its debt-to-GDP ratio to 66%. Any debt-to-GDP ratio above 60% in developing countries is considered imprudent according to the International Monetary Fund (IMF) and African Monetary Co-operation Program’s threshold. Beyond the threshold, a country will be at high risk of debt default. Signs of unsustainability The ability to borrow through financial markets is viewed by investors as a sign of competitiveness. Financial markets provide a platform for governments to borrow mainly for capital spending, but not too excessively. In Africa, this has not been the case. The following are some key indications of why African governments must consider discontinuing excessive Eurobond borrowing: African governments have been on a Eurobond issuing spree, piling on debt without evaluating the exchange rate risks and the real costs of repaying the debts. The IMF has identified 17 African countries with outstanding Eurobonds as near or under debt distress. Debt servicing is consuming an average of more than 20% of government revenue, leaving very few resources for other developmental needs. All the Eurobonds issued over the past three years were spent of non-productive short-term recurring expenditure and repayment of maturing bonds. Issues by Benin, Côte d’Ivoire, Kenya, Morocco, Gabon, Ghana and Egypt raised funds to support budget deficit and bond refinancing. The majority of issued Eurobonds are of short- to medium-term duration, but their proceeds are used to finance long-term projects. In some cases, these are loss-making projects, or the funds are unaccounted for. Ethiopia’s 10 failed mega sugar projects and the Kenyan loss-making Standard Gauge Railway were both funded from Eurobonds. Foreign exchange reserves are generally depleting in most African governments while they accumulate debt that needs repayments in foreign currency. Adequate forex reserves are important for government to meet its international finance obligations. Tax revenue in sub-Saharan Africa has been shrinking over the past 15 years in both real and absolute terms, because of weakening fiscal capacity. In a number of economies, the tax revenue collection is below the minimum desirable tax-to-GDP ratio of 15%. Such fiscal capacity is inadequate even to finance basic government budget. The continued borrowing from financial markets has led to high debt accumulation. Following the outbreak of COVID-19, some called for debt cancellation for highly indebted poor nations. The G20 and the Paris club creditors also called for multilateral debt relief to be extended to private creditors. In my view this continuous borrowing is unsustainable. It can only increase the fiscal fragility of African governments. It will be irresponsible to accumulate unsustainable debt for short-term gains to be repaid by future generations. High bond appetite Despite clear signs that Eurobond borrowing is unsustainable, governments continue to flood the market with new bond issues. In some countries, the new bonds are issued at higher interest rates than the previous issues. Some authorities are beginning to acknowledge that their Eurobond borrowing is driving debt stock to unsustainable levels. The common misconception around oversubscription of all bonds issued by African governments has not helped. High appetite for Africa’s bonds is viewed as a success story. But attention isn’t being paid to the high yields demanded by investors for purchasing them. Investors will continue to purchase the bonds as long as they are offered at the interest they need. But there are no checks and balances. The funds from Eurobonds have no conditionalities nor any lines of accountability. Unlike multilateral loans, governments are not required to provide detailed information

In January, Benin had kicked off Africa’s financial year with a historic €1bn Eurobond issuance split in two tranches. In July, it continued to tap global capital markets and became Africa’s first nation to issue an SDG-link Eurobond that raised another €500m. In total, the small country of 12m people, often overshadowed by its big neighbour Nigeria, managed to raise a historic €1.5bn, representing over 10% of its GDP. A Well Executed Fundraising Programme At the start of the year, Benin already made headlines with its double issuance of €700m (11-year tenor) and €300m (31-year tenor), which it raised at rates of only 4.875% and 6.875% respectively. Both issuances were massively oversubscribed by 300% and mobilized a total of €3bn, demonstrating significant appetite from global investors for Africa’s debt, even that of smaller and often under-estimated nations. While smaller, the €500m issuance of July is nonetheless historic because it represents Africa’s first Eurobond dedicated to the financing of projects linked to the Sustainable Development Goals (SDGs). Once again, it was massively oversubscribed and mobilized a total of €1.2bn. The bond has a very good rate of 5.25% and a tenor of 12.5 years. Benin Builds Investors’ Confidence Shortly after the January issuance, Fitch Ratings revised the outlook on Benin’s long-term foreign-currency Issuer Default Rating (IDR) from stable to positive and affirmed the IDR at ‘B’. Moody’s Investor Service followed in March by upgrading the Government of Benin’s long-term issuer and senior unsecured debt ratings from B2 to B1. Both upgrades were made on the back of strong fiscal consolidation track record, recognized efforts in debt restructuring and rising economic resilience. Benin remains one of Africa’s fastest-growing economies with GDP growth projected at 5% by the IMF this year, and at 5.6% by Fitch Ratings. The medium-term growth prospects are event better with a projected GDP growth rate of over 6% a year over the 2022-2026 period (IMF). What are the Pitfalls? Benin’s latest issuance shows a growing recognition of the benefits of sustainable borrowing from African governments. While Nigeria had been the first African market to issue a sovereign green bond back in 2017, no African nation had yet issued an SDG-link Eurobond. But overall, the country’s Eurobond borrowing strategy also reflects Africa’s growing appetite for external and foreign-currency debt, supported by interest rates often more attractive than on the domestic market. While several countries have seen the debt-to-GDP ratios soar in recent years, Benin’s outstanding public debt is only at about 46.1% of GDP according to 2020 data from the African Development Bank (AfDB). It is expected to average 40.9% of GDP over 2021–22, well below the 70% threshold set by the West African Economic and Monetary Union. As a result, the risk of debt distress remains moderate in the short-term, providing Benin continues to strengthen its domestic resources mobilization, broaden its tax base and diversify its sources of revenue. African markets have raised a significant amount of foreign-currency debt this year. Beside Benin, Côte d’Ivoire notably issued a €850m Eurobond in February (4.3%, 12-year) while Kenya raised $1bn in June by issuing a 12-year Eurobond at 6.3%. All these issuances were massively oversubscribed, further signaling investors’ confidence in the continent’s growth prospects. The last few months of the year will tell if other countries are able to surf on the same wave or not: on October 11th, Nigeria is notably tapping global markets with a Eurobond issuance expected to raise up to $3bn.