African countries face steep costs in global credit market
African nations are expected to grapple with elevated borrowing expenses in the global market in the short term, a consequence of the alluring interest rates available in the US financial market. This poses a challenge to the retirement of maturing Eurobonds for numerous states over the next two years.
George Asante, the Managing Director and Africa Head of Markets at Citi highlighted the arduous market access conditions facing African countries and companies, particularly in the realm of Eurobonds. The challenges stem from risk aversion influenced by tough economic conditions and pricing dynamics influenced by higher rates prevailing in developed markets. This risk premium is not limited to international markets but is also impacting domestic markets.
Asante emphasized the formidable hurdles faced by sub-investment grade assets, a category to which much of Africa belongs. He pointed out that when investors can secure returns of five or six percent in the US, convincing them to accept a comparable yield on an African asset becomes more challenging. Therefore, achieving a lower cost of funding for Africa may hinge on waiting for a shift in the interest rate environment in the US.
In the United States, the Federal Reserve has incrementally raised its benchmark rate, currently resting in the range of 5.25-5.5%, despite a moderation in inflation within the country. The most recent uptick occurred in July, reflecting a 0.25 percentage point increase. These substantial hikes, initiated from 0.25-0.5% in March 2022, have posed challenges for issuers like Kenya in attempting to issue a sovereign bond over the past year, with apprehensions centered around the high-interest rate expectations from potential lenders. Consequently, Kenya has turned to concessional lending through Bretton Woods institutions and bilateral agreements for external funding. This strategic move is prompted by the impending need to refinance its maturing $2 billion 2014 Eurobond by June of the coming year. Among other African issuers facing similar challenges, Zambia confronts a $1-billion Eurobond maturing next year, while Angola's $1.5 billion bond floated in 2015 is set for retirement in 2025, with a third already partially redeemed through a buy-back. To navigate the hurdles posed by the elevated cost of financing, Mr. Asante suggests that sovereigns must diversify their sources of loans.