08 May

High African Yields Raise Debt-Service Cost Concern, AfDB Says

Some African countries are overpaying for dollar bonds, raising concern about debt-service costs at a time when currencies are weakening against the greenback, according to the African Development Bank.

High interest rates make the continent’s bonds attractive to investors despite questions about the true extent of the debt loads of countries such as Zambia and the Republic of Congo.

“Raising a 30-year bond at a yield of 950 basis points — that’s very high,” AfDB President Akinwumi Adesina said in an interview in Johannesburg on Monday. Angola last week raised $1.25 billion selling a Eurobond due in 2048 at 9.375 percent.

Dollar bonds sold by African governments now yield 6.91 percent on average, compared with 5.66 percent in early January, Standard Bank Group Ltd. Indexes show. That compares with 6 percent for emerging markets generally.

African and emerging-market Eurobonds have sold off heavily in the last three weeks as the dollar strengthens and U.S. rates rise.

African nations have sold $18.3 billion of euro and dollar-denominated debt so far in 2018, already beating full-year records. Nigeria, Kenya, Senegal, Egypt and Angola have all issued 30-year tranches. Ghana is planning to sell as much as $2.5 billion of Eurobonds in 2018 and South Africa $3 billion.

The region’s average government debt ratio had increased about 20 percentage points in the past six years to 53 percent of GDP, according to Fitch Ratings Ltd. Still, public debt in Africa is far from crisis level, Adesina said.

Some nations will be better off selling local-currency bonds rather than take up foreign-denominated obligations, he said. That’s to avoid a currency mismatch, where the assets a government invests in generate income in local currency while the debt has to be repaid in a foreign denomination.

“If you have weak exchange rate, it means that you’re going to use a lot of your money to service your debt,” he said.

Nigeria announced plans last year to sell $5.5 billion of dollar-denominated securities, most of which would be to refinance existing domestic debt and reduce servicing costs.

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