African Bonds Oversubscribed

The African bond market is heating up again after years of sovereign defaults and Covid-related headwinds.

International investors, long jittery over debt default risks in the markets for African sovereigns and eurobonds, have started to return to the region’s long-term issuances, buoyed by attractive yields and stronger liquidity.

Global fund holders snapped up Egypt’s first Islamic bond issue in February; the sukuk offering was four times oversubscribed, at $6.1 billion against an initial booking of $1.5 billion. The same month, Morocco successfully floated two tranched bond offerings worth $2.5 billion.

Rufas Kamau, market analyst at FXPesa in Kenya, noted that enhanced liquidity following announcement of the US Bank Term Funding Program (BTFP) last month allows banks to borrow shorter-term money that was previously locked up in 10-year bonds.

“If the banks tried selling the bonds at high interest rates, they would have sold at a loss. Now they can borrow from BTFP, backed by bonds at par value,” Kamau says.

While the program has injected US-dollar liquidity into the markets, it is also expected to be inflationary in the near term. Nonetheless, “a losing dollar is very attractive for investing in” frontier and emerging-market bonds such as those issued by Egypt and Morocco, says Kamau. Investors are eying African sukuks as a haven from traditional international finance markets.  Moody’s assigned a (P)B3 rating to Egypt’s first sukuk issue. Its analysts voiced concern over the North African country’s “reduced external buffers and shock absorption capacity while the economy undergoes a structural change toward a more export- and private sector-led growth model under a flexible exchange rate” regime.

South African markets analyst Simon Brown notes that earlier defaults by Ghana and Zambia had cast some doubt on African debt markets. “Default’s never good,” he says. “Ghana had some very oversubscribed US-dollar bonds and that’s hurt them as their currency weakens.” On the other hand, he adds, “emerging markets yields such as in Egypt and Morocco will always be attractive for those with a mandate and happy with the extra risk, and this is attracting investors.”