Saturday, June 7, 2014

This time is no different with Africa's bond issuances

There is nothing that convinces me that "this time is different" with the current spate of African sovereign bond issuances. FT highlights the scale of the trend,
African countries raised a record of more than $11bn in hard-currency sovereign bonds last year, up from $6bn in 2012 and just $1bn in 2000, according to industry estimates.
Kenya is the latest, initiating roadshows to raise $2 bn in sovereign bonds. Apart from the standard "resource curse" challenges of poor governance, corruption, and inefficiency, which by themselves are matters of very serious concern, there are three other worries,

1. All these countries have a medium-term trend of depreciating currencies. This has been despite the commodities boom and is most likely to gather pace as the commodities cycle reverses. The travails of Zambia, where Copper accounts for 60% of its exports, is just a portend of what is likely to come. The real debt burden (and effective cost of borrowing) would increase dramatically with depreciating currencies. In simple terms, these countries may have borrowed at the peak of the commodities cycle, when their currencies are the strongest (they could have been), and the potential down the line is for increasing effective borrowing rates.  

2. A significant share of these loans are to finance infrastructure investments, especially transportation facilities. In all such cases, the revenues are invariably in local currency while the repayments are dollar-denominated, thereby raising a currency mismatch on the country's balance sheet. This highlights the challenge with all external financing of infrastructure - developing countries suffer from inadequate domestic capital to finance capital investment spending, therefore necessitating external capital, which in turn carries the risk of currency mis-matches and attendant problems.  

3. All the recent successes with raising capital are most certain to have been done with less than rigorous due-diligence. In recent years, the euphoria surrounding African resurgence on the back of high commodity prices and oil discoveries, has been complemented by a world awash with cheap capital and investors chasing higher yields. In such euphoric times, finance loses its disciplining powers. A famous example of this was Zambia's 2012 $750 million 10 year Eurobond issuance at 5.625%, cheaper than even Spain's sovereign debt at that time. In some ways, once the African bond bubble bursts, it will add to the long list of collateral damages from quantitative easing policies. 

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