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Market pressures to dampen sovereign bond issuance

By Sid Verma
25 May 2010

Budding African sovereign bond issuers are poised to tap international capital markets this year, but global market volatility and high risk premia will moderate the pace of new issuance, bankers and issuers have said

Budding African sovereign bond issuers are poised to tap international capital markets this year, but global market volatility and high risk premia will moderate the pace of new issuance, bankers and issuers said on Wednesday.

Robert Fernandez, head of African debt capital markets at Standard Bank, said: “It is not about macro-economic conditions [in Africa], at the moment, it is global market conditions. Who wants to issue in a storm?”

Daniel Berman, Johannesburg-based director of debt capital markets and derivatives at JP Morgan, said: “I don’t think the eurozone crisis will derail African sovereign bond issuance – though it may affect the timing.”

Carlos Panzo, national director for macroeconomic management at the Angolan Ministry for Economic Coordination, said the country would consider issuing a benchmark bond in the second half of the year to plug the budget gap. The deal would be a yardstick for prospective Eurobond issuances this year in other markets in the region.

On Wednesday, Ghana – last in the market in 2007 with a $750 million deal – said it may consider issuing bonds next year to finance infrastructure. But the volatility of its public finances and the need to beef up debt management capacity could delay the process, said Yvonne Quansah, acting director of the financial sector division at Ghana’s Ministry of Finance and Economic Planning.

Kenya, Mozambique, Nigeria and Tanzania have in recent months also indicated their intention to borrow.

But high risk premia and the absence of a mainstream foreign investor base for African bonds suggest international bond issuance will be a niche source of external finance for African governments in the near-term, according to Cyrus Ardalan, head of Public Sector Group at Barclays Capital.

“The supply, limited to benchmark deals from a limited pool of African countries, does not offer adequate liquidity for most mainstream investors – so African debt will remain more of a very niche investment”, he said.

But Fernandez at Standard Bank said that supply of African sovereign bonds is set to skyrocket in the coming years. “Anyone who is doing infrastructure and getting money from China needs a 15% down-payment – and that can only come from international markets.”

Budding capital-raising from African governments has raised hopes in markets that the region’s access to international finance is gradually diversifying away from traditional bank lending and foreign direct investment. Domestic markets are largely illiquid and international funds are desperately needed for African project finance.

Quansah said: “We need growth in Ghana to be 8% in order to become a middle income status country and therefore, international financing is needed to meet our huge infrastructure needs.

“We are aware of the need to mobilize domestic savings but it is still cheaper to go in international markets than local markets.”

In 2008, private capital flows took a hit, spreads on African bonds widened dramatically, and an estimated $3.3 billion of planned sovereign bond issuance was put on hold, according to the IMF.

But at the end of 2009, spreads on the region’s external bonds – from Gabon, Ghana, Seychelles and South Africa – returned to pre-crisis levels, as risk appetite for emerging markets returned.

This has unleashed a tide of optimism that markets are now pricing in Africa’s strengthening economic fundamentals as in previous crises Africa’s recovery has typically lagged other emerging markets.

By Sid Verma
25 May 2010