Eurobonds can refloat Africa’s boat

After two years of near total exclusion from the eurobond market because of eye-wateringly expensive interest rates demanded by investors to compensate for high inflation, debt sustainability concerns and weakening local currencies, sub-Saharan sovereigns have seen the market roar back to life in 2024.

In just the first two months of this year, Benin, Côte d’Ivoire and Kenya have seen newly eager investors pile into a combined US$4.8bn of eurobond transactions, all of them oversubscribed. Benin raised US$750m at a yield of 8.4% in a 14-year bond, Côte d’Ivoire US$2.6bn at 8.5% in a nine-year and 13-year bond, and Kenya US$1.5bn at 10.4% in a seven-year note. It marks a significant and hugely welcome return to favourable borrowing conditions for African sovereigns.

For many African countries the eurobond market not only offers the prospect of relief in difficult times, but also helps foster fiscal discipline as investors and rating agencies maintain their scrutiny of an issuer.

Credit desert

Effectively locked out of the eurobond markets since early 2022, most African countries have seen their fiscal space tighten even further. Concessionary loans from international development finance institutions such as the World Bank and loans from bilateral creditors such as China have dried up under the scorching heat of global financial conditions. Countries facing severe economic difficulties have had to service existing foreign debt (including eurobonds) without the refinancing lifeline of the eurobond markets.

The fiscal squeeze has been especially severe because African nations, like so many others around the globe, have experienced inflation spikes. As monetary authorities raised central bank lending rates in response, much needed capital was driven out of African markets. And fiscal spaces didn’t just tighten, they gradually disappeared, leaving some countries in parlous positions. A few have ended up at the IMF’s doors – Kenya, for example, benefited from a US$941m IMF loan boost in January 2024.

Africa’s eurobond yields also spiked during the global financial crisis of 2007–09 and during Covid-19. However, the latest rate-hiking cycle has seen them hit their highest point in recent times, with average yields touching 15%, a prohibitively expensive level, in October 2022. It has pushed countries such as Ethiopia, Ghana and Zambia into debt distress and exposed the likes of Egypt, Kenya and Tunisia to high debt risks.

Investors return

Over the years, Africa has come to rely on the eurobond market to finance budget deficits, infrastructure provision and debt service. By the end of the third quarter of 2023, African sovereign eurobonds with a face value of US$142bn were trading at a market value of about US$125bn. With sovereign spreads falling, the values of these bonds have begun to rise and investor interest is returning.

This trend is projected to continue over the next few quarters. As global inflation subsides and monetary authorities bring down policy rates, yields are trending down, and eurobonds are once again becoming an option for financing African budgets, and even for refinancing earlier eurobond issues.

With Benin, Côte d’Ivoire and Kenya having opened the eurobond issuance door again for African sovereigns, a handful of other countries are expected to follow suit this year. They include Africa’s biggest oil producers, Angola and Nigeria, which are both contending with high inflation and currencies that have plummeted since mid 2023.

A note of caution, though. Sovereigns that borrow in foreign currency cannot simply expand the money supply to pay that debt, as they can for domestic currency debt. Judicious use of the borrowed funds is therefore essential, as is the need for clear repayment plans that do not place onerous future burdens on their economies.