Following a significant shift in market sentiment in 2020H2, Sub-Saharan African (SSA) sovereigns regained access to international bond markets, while Northern African countries had largely preserved their ability to issue.
In this Macro Notes, we update our analysis from early 2020 and provide an outlook for African Eurobond issuance this year. Since 2020Q3, four sovereigns tapped the Eurobond market—Benin, Côte d’Ivoire, Egypt, and Morocco—with others expected to follow suit in 2021.
Favourable liquidity conditions, thus, allow for the rollover of maturing debt and the financing of wider fiscal deficits (Exhibit 1). This will also compensate for less support from IFIs following large disbursements in 2020.
However, medium-term concerns remain as African countries face repayments of close to $100 bn over 2021-32 as a result of high issuance in recent years ($147 bn over 2009-20), taking advantage of the persistent low-interest-rate environment in the aftermath of the GFC.
Amortization challenges differ markedly within the region, both in terms of the outstanding amount in GDP terms as well as the average remaining maturity of the debt (Exhibit 2).
Despite both COVID-19-related cross-regional developments as well as idiosyncratic concerns, market sentiment appears to be broadly favourable across Africa, with most countries’ bonds trading at or even above pre-pandemic levels.
As of February 2021, twenty African countries owe a total of $134 bn in Eurobond debt, with SSA accounting for roughly 60%.
In GDP terms, however, the burden is larger in Northern Africa, where Eurobonds account for around 10%. The continent’s three largest economies—Egypt, South Africa, and Nigeria—have issued more than 50% of the total (Exhibit 3).
We expect most of the largest issuers to return to the market in the coming months—following successful issuances by Côte d’Ivoire, Egypt, and Morocco, and Benin (Exhibit 4)—with the exception of Angola where recent unfavourable debt dynamics triggered sovereign rating downgrades by all three agencies (Exhibit 5).
Risks in most countries are perceived as moderate and stable (Exhibit 6).
Barring a dramatic shift in market sentiment, African issuers will likely encounter high interest from foreign investors, indicated by the remarkable recovery in asset prices over the 2020H2 (Exhibits 7 and 8).
Bonds of the continent’s largest economies are trading at or above pre-pandemic levels, with the exception of Zambia, which defaulted on coupon payments at the end of last year, and Ethiopia, where the authorities’ recent commitment to the G20 “common framework” has raised questions regarding the restructuring of Eurobonds.
However, non-Paris Club official creditors are the primary focus of the initiative rather than bondholders.
A number of Sub-Saharan African sovereigns are likely to tap the Eurobond market in 2021, including South Africa where the National Treasury has signalled that it would raise $3 bn from the international bond market during FY2021/22 (April 2021- March 2022).
With oil prices expected to remain around $50/bbl and exports constrained by OPEC+ commitments, Nigeria will likely take advantage of investor interest and issue $3-4 bn this year.
This will alleviate external financing pressure as a multi-year IMF program is currently unlikely due to disagreements over the multiple exchange rate regime and as investors remain hesitant to fully reengage in NGN-denominated debt following recent problems with access to foreign currency.
Ghana’s parliament approved the issuance of $3-5 bn last year, depending on market conditions, and the country’s deteriorating fiscal position will require significant external financing this year.
However, given such concerns, we believe that markets will likely not absorb more than $3.5-4 bn. Due to significant issuance in recent years ($8 bn over 2018-20), Eurobond debt is expected to reach close to 20% of GDP in 2021, raising questions regarding the sustainability of the current financing model.
Finally, while authorities in Kenya are committed to moving away from non-concessionary financing and staff-level agreement over a three-year
$2.4 bn combined ECF/EFF was reached with the IMF in recent days, a smaller issuance is possible to pre-finance upcoming re- payments while interest rates are attractive.
Recent clarifications from rating agencies on the treatment of DSSI participation have encouraged authorities that access to the Eurobond market can be preserved while achieving debt relief from official creditors.
However, the case of Ethiopia shows that a lack of clarity can trigger significant market reactions and sovereign rating downgrades.
Exhibit 5. Credit ratings and debt risk. Exhibit 6. Risks are rising in Ethiopia and Tunisia.
Egypt is by far the largest issuer on the African continent with total Eurobond debt standing at $38.6 bn following the sale of an additional $3.75 bn last week. The issuance was more than four times oversubscribed, illustrating continued high investor interest in Egyptian assets.
Demand also extends to the local debt market, where foreigners are attracted by continued high yields, a stable exchange rate, and the IMF program as a macro policy anchor. We expect net capital inflows (non-resident capital inflows minus resident capital outflows) to more than double in FY 2020/21, supported by the recent recovery in non-resident holdings of treasury bills.
FDI inflows may continue to decline modestly to around $5 bn and remain concentrated in the energy sector; more FDI in manufacturing and in the digital economy will be needed. We expect the external funding gap to reach around $7 bn in FY2020/21. Thus, it is likely that Egypt will tap the international market again this year—possibly to the tune of $3 bn—and in 2022.
Overall, Egypt’s external funding picture warrants caution as the current account and fiscal deficits will widen this year, and debt amortization remains high in the coming years. We expect the fiscal deficit to widen to 8.5% of GDP in FY 2020/21 because of lower growth in tax revenues and scaled-up spending.
The recent rollover of short-term debt and financing from the IMF have eased external financing needs and shored up official reserves. The projected sharp decline in receipts from tourism, however, will widen the current account deficit to 4% of GDP in FY2020/21.
Beyond Egypt, we believe that Morocco will tap the international market with the issuance of around $2.5 bn this year, while Tunisia will need to rely on concessionary funding under a new IMF program to address high financing needs, as an external debt of 90% of GDP would give investors pause.
We expect total issuance by African sovereigns to rebound this year, reaching around $25 bn up from $15 bn in 2020, largely as a result of a pickup in Sub-Saharan Africa (from only $5.2 bn last year).
Thus, 2021 will see the third-largest number on record—below only $26.6 bn in 2019 and $28.8 bn in 2018—indicative of the dramatic positive shift in market sentiment in 2020H2 following the COVID-19-induced selloff in the first half of the year.
While high demand from foreign portfolio investors alleviates financing pressure in the short run, medium-term concerns will only grow. Countries in the region face around $100 bn in Eurobond repayments over 2021-32, $58 bn of which are accounted for by Sub-Saharan African sovereigns.
Rolling over of maturing debt could become significantly more expensive in the coming years should the prevailing low-interest-rate environment come to an end.