Sub-Saharan Africa debt sales hit record high

Sub-Saharan Africa sovereign bond issuance has hit a record, with the return of Ghana to international capital markets in spite of its shaky financial situation pushing sales so far this year to nearly $7bn, above the record set in 2013 for the whole year.

Africa has been one of the top beneficiaries from strong demand from pension funds, insurers and sovereign wealth funds seeking higher-yielding assets as ultra-lax monetary policy in the US, Europe and Japan depresses returns elsewhere.

The hunt for yield is pushing aside concerns about whether African countries would be able to repay the debt, and the fiscal and economic policies of individual nations.

Ghana, which is battling a double-digit fiscal deficit and seeking talks with the International Monetary Fund for financial support, was able to raise $1bn in an over-subscribed deal on Thursday. However, it was forced to pay a relatively high yield of 8.25 per cent.

“The low interest environment – thank you Mr Draghi – has certainly helped Ghana place this deal, along with a well-timed call for IMF assistance,” Kevin Daly, a London-based senior manager at Aberdeen Asset Management, said.

Sub-Saharan African countries last year raised a record $6.3bn through hard-currency sovereign debt, according to Dealogic, the data provider. With the addition of Ghana, and earlier bond deals by South Africa, Senegal, Kenya, Ivory Coast and Zambia, the region has raised $6.9bn this year, a new peak.

Christine Lagarde, IMF managing director, earlier this year warned African countries about the risk of spoiling a good record of strong economic growth over the past decade “overloading the countries with too much debt”.

Ghana was the country that epitomised the ‘Africa rising’ narrative of strong economic growth and improved governance and was the first country in sub-Saharan Africa – with the exception of South Africa and the Seychelles – to raise funds from the international capital markets through a sovereign bond.

Foreign debt issued by a diverse range of frontier market countries has attracted heavy investor demand this year, as yields in the world’s largest debt markets remain low. This has led to impressive pricing, allowing countries such as Ecuador and Pakistan to raise millions of dollars at yields of less than 8 per cent.

Kenya in June raised $2bn from international investors in a single day, the largest debut for an African country in the sovereign bond market.

But the Ghanaian bond also suggests that investors are becoming more selective in their bets in frontier markets as the perception of risks increase.

Ghana was forced to pay an interest rate significantly higher than Kenya, Ivory Coast and Senegal did for similar bonds earlier this year, and the demand was also far lower. The bond was oversubscribed just two times, compared with demand for four-to-six times the size of the note in other countries.

In spite of Ghana’s economic problems, Stephen Bailey-Smith, head of Africa research at South Africa’s Standard Bank, said he was unsurprised that investors were keen to buy the country’s debt. “Falling US Treasury yields means that the spread is a bit higher than it was when Ghana issued debt last year, and they are looking at what the country is going to do, not just what it has been through. The prospect of IMF funding is therefore a huge boost.”