Ethiopia’s foray into Int’l capital market – lessons from Africa

For the most part, African countries long have had to rely on foreign aid or loans from international financial institutions to supply part of their foreign exchange needs. When compared with other emerging regions, Africa is the most dependent on multilateral and bilateral financing. At the end of 2011, those two sources jointly accounted for more than two thirds of public (and publicly guaranteed) external debts in Africa. In fact, half of African countries have no alternative way of accessing external financing

Official donors’ flows are now on a declining trend in real terms as the ongoing financial crisis have pressed donor governments to tighten their budgets. African countries would also like to reduce dependence on the usual aid providers and attain policy independence and finance projects that such donors have been unwilling to fund.

Now, for the first time many of them are able to borrow in international financial markets, selling mainly Sovereign bonds. A Sovereign bond is a debt security issued by a national government. Known as a Eurobond, is denominated in a foreign currency (usually the dollar, rather than, as its name would suggest, the Euro). Still only 14 out of 54 countries have been able to issue Eurobonds on international markets, in part because the process is rather complex. In addition, many countries remain unrated and are still subject to political instability.

What is new?

The developed world has been rocked by a succession of economic and financial crises while Africa has maintained solid growth over recent years, averaging about 5% per annum. The chief global economist at Renaissance Capital estimates the economy of Sub-Saharan Africa to grow 15-fold over the next 35 years; from $2 trillion to $29 trillion. Hence, they have considerable infrastructure necessities — such as electricity generation and distribution, roads, airports, ports, and railroads, which often require resources that exceed aid flows and domestic savings.

For many African governments, Eurobonds are a means of diversifying sources of investment finance and stirring away from conventional foreign aid. Not only do these bonds allow such governments to raise money for development projects when domestic resources are lacking, they also help reduce budgetary deficits in an atmosphere in which donors are not willing to boost their development assistance. In addition, bond issuances come with fewer strings attached than money from multilateral institutions. Governments also have more control over where they direct the money.

Changes in the institutional environment, reduced debt burdens, large borrowing needs, and Low borrowing costs are some of major factors propelling the burgeoning bond sales. Reduced debt burden also allows countries to borrow in international markets without straining their ability to repay. (The median government debt–to-GDP ratio in SSA is below 40%) In addition, many countries have strengthened their macroeconomic management and improved their ability to measure debt sustainability. Sovereign credit ratings, which are a good measure for the creditworthiness of a country, capture factors like a country’s sustainability of its external financial operations, the ratio of external debt to exports; and macroeconomic stability (mainly measured by inflation performance).

Analysts credit this surge in borrowing to factors such as rapid growth and better economic policies, low global interest rates, and the economic stress in many advanced economies, especially in Europe. In several cases, African countries have been able to sell bonds at lower interest rates than distressed European economies like  Greece and Portugal could. Although borrowing costs are historically low, yields of Eurobonds from Africa are high enough to draw foreign investors.

African Eurobonds

eurobondAttracted by the prevailing low interest rates, cash-strapped African countries looking to borrow money on international private markets are increasingly turning to Eurobonds. In 2006, Seychelles became the first country in SSA (except South Africa), to issue bonds in 30 years time. After a year Ghana followed by raising $750 million. Since then Gabon, Senegal, Côte d’Ivoire, D.R. Congo, Nigeria, Namibia, Zambia and recently Kenya have joined them.

Africa’s largest economy, Nigeria, entered the markets in 2011 with a 10-year Eurobond. In September 2012, Zambia made a splash on the international private market, launching a 10-year bond at $750 million. Rwanda followed suit in 2013 with a $400 million Eurobond. Kenya made a heavily oversubscribed inaugural debut in June to finance infrastructure projects raising $2 billion. According to Moody’s, a global credit rating agency, African countries raised about $8.1 billion in 2012. Financial Times reports investors placed orders for more than $8 billion showing the strong appetite for frontier market bonds.

What are the benefits?

The main benefits of international sovereign bonds are capital expenditure financing, benchmarking and raising visibility with a larger pool of international investors. In 2007, Ghana used bond proceeds to finance energy and transport projects. The proceeds of Senegal’s $500 million Eurobond issuance let the continued construction of a major highway and the upgrade of its energy infrastructure.

Sovereign bond issuance is usually the first step for a country’s wider access to private capital as it provides a benchmark for other national issuers and acts as a indication point in the appraisal of country risk for international investors. Benchmarking for the corporate bond markets is the most important development that African economies are experiencing. For example, following the inaugural $750 million Eurobond from Ghana in September 2007, Ghana Telecom placed a $200 million issue in the international market two months later.

Countries in SSA that issue inaugural bonds to raise at least $500 million will be qualified for inclusion in JP Morgan’s Emerging Market Bond Index (EMBIG). This elevates their visibility with a larger pool of investors and set a benchmark yield for local corporations and banks that desire to issue internationally.

Although some countries were able to issue 10-year paper or above, long-dated issue remains rare, thus most debt remains constrained at one year or below. The absence of a long yield issue in these countries is attributed interest rate and inflation volatility, public finance risk and lack of demand from investors.

Is it sustainable?

Whether this borrowing spree is sustainable in the medium-to-long term is open to question. The low interest rate environment is e expected to change in near future thus raising borrowing costs and reducing investor appetite. The current fast economic growth may not continue making it harder for African countries to service their loans. Furthermore, political instability in some countries could also make it harder for both borrowers and lenders. Political instability is also a factor that could put a twist in the whole process, reducing economic growth and increasing interest rates.

In a commentary entitled “First Borrow,” Amadou Sy, deputy division chief at the, points to recent sovereign defaults such as; the Seychelles default on a $230 million Eurobond in 2008, after a sharp fall in tourism and Côte d’Ivoire’s missed $29 million interest payment in 2011, after election disputes forced it to default on a bond issued in 2010. Government issuers also bear exchange-rate risk on the service of foreign currency debt. If repayment of the bullet maturity of the Eurobond coincides with a sharp depreciation of the exchange rate, the fiscal cost of repaying will be even higher.

Ethiopia – Reasons and Prospects

Ethiopia, Africa’s fifth biggest economy and one of the fastest growing frontier markets, is to become the latest entrant into international capital markets. Ethiopia attained its first sovereign credit rating in May, in which the popular rating firms Standard & Poor (S&P), Moody’s and Fitch rated her creditworthiness as B, B1(B+) and B, respectively. The ratings put Ethiopia in the same cluster with other strong African economies such as Kenya, Ghana and Zambia. Following this, she announced to make her maiden sovereign bond debut of a 10-year note by early January. Reports show that the government carried out preparations including the selection of three international banks (Barclays, Citi and BNP Paribas) that will help to select firms that will sell the bonds on behalf of the government and also a French advisory firm, Lazard Ltd.

The bond proceeds are expected to provide financing for her various infrastructure projects (such as roads, airports and railroads) and especially projects that IFI’s have been unwilling to finance like the Great Ethiopian Renaissance Dam (GERD). This in turn reduces the domestic borrowing pressure on the economy. The expected successful issuance will make Ethiopia eligible for inclusion in JP Morgan’s Emerging Market Bond Index (EMBIG) raising her FDI visibility and set a benchmark yield for local corporations such as EthioTelecom and EEPCo that may wish to issue internationally.

According to Moody’s analysis, only a few countries could raise a $500 million Eurobond internationally without distorting their economic and financial equilibrium, issuance representing below 5% of GDP, and a debt increase below 10%.. In Moody’s estimate, of a hypothetical $500 million Eurobond issuance would represent 1.1% of Ethiopia’s GDP and a debt increase of 4.7%, which will be 7.1% of general government revenue.

Strong economic growth and a low total debt to GDP ratio of 51.6% relative to western nations put Kenya in a strong position in its heavily oversubscribed maiden Eurobond issue in June in which she raised $2 billion, the largest debut for an African nation. This came in spite of a terror attack that killed 48 people. Analysts suggest expected 2014 GDP growth of about 5.8 % might have prompted investors not to ask for a much higher yield than the 6.875% interest Kenya offered for its 10-year paper.

With a total debt to GDP ratio of 35% and an expected 2014 GDP growth of 9% (Fitch Ratings), Ethiopia is expected to achieve similar success. Julians Amboko, a research analyst at Stratlink Africa believes Ethiopia is better positioned than many SSA countries because of its debt to GDP ratio of 35%, which is much lower than Kenya’s  51% and its budgetary structure that makes it a lot more debt reliant than Kenya and therefore, could easily surpass the one billion mark in its maiden debut.


Fetsum Berhane is an Ethiopian resident, economist researcher and a blogger on HornAffairs.

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