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Emerging Markets

North African bond issuers face spell on the sidelines amid volatility


Bond issuance from North Africa has never been high, but there has been none so far in 2022

Economic and political problems in North African countries mean unless international investors change their minds on risk, prospects for bond issuance are dim.

Dollar or euro issuance is never heavy from North Africa, and no deals have come from the region in 2022 so far, although Egypt did tap the Japanese market in March for ¥60bn ($496m).

Last year there were just four deals, including two from Egypt, totalling $9.5bn. And in 2020 there were also four deals worth $9.9bn, again with two from Egypt.

Countries in the region are vulnerable to high commodity prices, higher since the war in Ukraine began. Tunisia, Morocco and Egypt are all heavily reliant on wheat imports from the Black Sea.

Consumer prices in Egypt were 13% higher in April than in the same month the year before, driven by a 26% rise in food prices. The country may be on the cusp of securing IMF help and has also received heavy investment from Gulf neighbours, which could make it more attractive to foreign bond investors.

“It’s difficult for anyone in EM to issue right now but very difficult for North African sovereigns,” said a London-based EM fund manager.

“Egypt will benefit from a possible IMF deal and support from the Gulf. Morocco could print a bond. But we would need a rebound in risk sentiment for either to come to market.”

Morocco (Ba1/BB+/BB+) may be best placed in North Africa, the investor continued, even though Egypt (B2/B+/B) is a more familiar issuer. Francophone Morocco last issued a bond in December 2020, selling a $3bn note, its first in dollars in seven years.

“Morocco has better ratings, although they did lose investment grade,” said the investor. “They come rarely and usually in euros, so if they came in dollars there would be support. Egypt is fundamentally stronger economically, but investors are overweight Egypt so that works against them.”

EM bankers and investors agree Tunisia is locked out of the international bond market. It avoided default in April after meeting a $1bn redemption, but default fears persist. Fitch Ratings in March cut Tunisia’s rating to CCC and Moody’s has a Caa1 rating with a negative outlook.

The Tunisia $1bn 5.75% January 2025 note was quoted at a cash price of 65 to yield 23%, reflecting default worries. By comparison, Egypt’s $1.75bn 7.625% May 2032s were quoted at 73/78, yielding 12%.

“There is zero market access for Tunisia with a yield at that level on a three year,” said the investor. “You’d still need a meaningful return of risk sentiment for Egypt to print. But for Tunisia, there are other issues to solve before they can return to the market.”

Economic problems in North Africa are increasing the risk of political turmoil, with the Arab Spring between 2010-2012 still fresh in the memory of politicians and investors.

“It’s something that keeps coming up,” said the investor. “It’s not just investors worried about the political situation in North Africa. The last time food prices spiked like this the Arab Spring happened. If foreign governments are worried about it, so are investors.”