In recent years, a growing number of African governments have issued Eurobonds, diversifying away from traditional sources of finance such as concessional debt and foreign direct investment. Taking the lead in October 2007, when it issued a US$750 million Eurobond with an 8.5 percent coupon rate, Ghana earned the distinction of being the first sub-Saharan country — other than South Africa — to issue bonds in 30 years.
This debut sub-Saharan issue, which was four times oversubscribed, sparked a sovereign borrowing spree in the region. Nine other countries — Gabon, the Democratic Republic of the Congo, Ivory Coast, Senegal, Angola, Nigeria, Namibia, Zambia and Tanzania — followed suit. By February, these ten African economies had collectively raised US$8.1 billion from their maiden sovereign-bond issues, with an average maturity of 11.2 years and an average coupon rate of 6.2 percent. These countries’ existing foreign debt, by contrast, carried an average interest rate of 1.6 percent with an average maturity of 28.7 years.
It is no secret that sovereign bonds carry significantly higher borrowing costs than concessional debt does. So why are an increasing number of developing countries resorting to sovereign-bond issues? And why have lenders suddenly found these countries desirable?
With quantitative easing having driven interest rates to record lows, one explanation is that this is just another, more obscure manifestation of investors’ search for yield. Moreover, recent analyses, carried out in conjunction with the establishment of the new Brazil, Russia, India, China and South Africa (BRICS) bank, have demonstrated the woeful inadequacy of official assistance and concessional lending for meeting Africa’s infrastructure needs, let alone for achieving the levels of sustained growth needed to reduce poverty significantly.
Moreover, the conditionality and close monitoring typically associated with the multilateral institutions make them less attractive sources of financing. What politician would not prefer money that gives him more freedom to do what he likes? It will be years before any problems become manifest — and, then, some future politician will have to resolve them.
To the extent that this new lending is based on Africa’s strengthening economic fundamentals, the recent spate of sovereign-bond issues is a welcome sign. But here, as elsewhere, the record of private-sector credit assessments should leave one wary. So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world’s next debt crisis?
The risks will undoubtedly grow if sub-national authorities and private-sector entities gain similar access to the international capital markets, which could result in excessive borrowing. Nigerian commercial banks have already issued international bonds; in Zambia, the power utility, railway operator and road builder are planning to issue as much as US$4.5 billion in international bonds.
Evidence of either irrational exuberance, or market expectations of a bailout is already mounting. How else can one explain Zambia’s ability to lock in a rate that was lower than the yield on a Spanish bond issue, even though Spain’s credit rating is four grades higher? Indeed, except for Namibia, all of these sub-Saharan sovereign-bond issuers have “speculative” credit ratings, putting their issues in the “junk bond” category and signaling significant default risk.