Economic and security woes dim 'Africa rising' story

Countries in the sub-Saharan continent are keen to tap the debt markets amid concerns over their short-term growth and investment prospects

PUBLISHED : Thursday, 17 July, 2014, 11:50am
UPDATED : Friday, 18 July, 2014, 2:25am

For evidence of the ferocious appetite among investors for higher-yielding assets, look no further than the buoyant demand for the debt of the economies of Sub-Saharan Africa.

On Wednesday, Ivory Coast, which defaulted on its debt three years ago, launched a US$750 million 10-year US-dollar-denominated bond issue that was more than six times subscribed and was expected to price at a yield of just 5.6 per cent.

Strong economic growth rates and cheaper funding have created their own set of problems

This comes a month after Kenya raised US$2 billion in the largest debut for an African economy in the sovereign debt markets. Not only was the sale four times subscribed, the yields on the five and 10-year US-dollar-denominated bonds were significantly lower than analysts expected, at 5.8 per cent and 6.8 per cent, respectively.

Several other African economies have tapped the international debt markets this year, with Zambia selling a 10-year bond on April 7 and Rwanda issuing its first international bond on April 25. Following the record US$11 billion the continent raised in the international bond markets last year, Africa's sovereign issuance this year is now almost certain to exceed that amount.

While the buoyant demand for the debt of frontier markets stems mainly from the "reach for yield", Sub-Saharan Africa's strong growth rates, improving creditworthiness and "increasing resilience to regional and global headwinds" are drawing foreign investment.

Unfortunately, strong economic growth rates - Sub-Sahara Africa expanded nearly 5 per cent last year and is expected to grow a further 5.5 per cent this year, according to the International Monetary Fund - and cheaper funding have created their own set of problems.

The robust growth rates and improved creditworthiness that many commentators have dubbed "Africa rising" are only part of the story.

The other part, which bond investors are choosing to downplay for the time being, is the rapidly deteriorating economic fundamentals and security conditions in several economies.

Quite a few African countries have had their credit ratings downgraded this year. Others are facing an upsurge in terrorism and ethnic violence, which is undermining political stability and threatening investment in infrastructure.

In a report in April, the IMF singled out Ghana and Zambia for having taken countercyclical fiscal policy - which enabled many African economies to mitigate the contractionary effects of the 2008 global financial crisis - to its extreme.

The IMF said both countries used the proceeds from capital inflows to finance huge increases in primary spending, notably on subsidies and wages. The two, in particular Ghana, are now economic basket cases, with dangerously high fiscal and current account deficits as a share of gross domestic product.

In Kenya, which at least boasts stronger fundamentals, scores of people have recently been killed in attacks attributed to al-Qaeda-linked jihadis from the al-Shabab group.

Judging by the scale of the demand for Kenya's debut euro bond last month, foreign investors have not been put off by the violence and still believe in the country's growth story.

Are they being too complacent? Probably.

But even the most developed African economies have their fair share of problems and do not provide the kind of returns on offer in the continent's less mature markets.

South Africa, the second-largest African economy and one of the most liquid emerging markets, is currently flirting with recession and was downgraded by Standard & Poor's last month, partly because of a debilitating five-month-long strike in the country's crucial platinum industry. While the strike ended last month, industrial relations remain extremely tense.

While the IMF is upbeat on the long-term growth prospects of Africa, it is rightly concerned about the short-term outlook.

The biggest risk facing the region is a sharper-than-expected slowdown in China's economy, which would hit demand for the region's exports and threaten investment in Africa. The other key external risk is the tightening in monetary policy in the United States.

It is hardly surprising, then, that many African economies are keen on coming to market while financial conditions remain favourable.

Nicholas Spiro is the managing director of Spiro Sovereign Strategy