African sovereigns will continue to face steep borrowing costs in the international market in the near term due to attractive rates on offer in the US financial market, complicating efforts to retire maturing Eurobonds for several states in the next two years.
Citi Managing Director and Africa head of markets George Asante told the Business Daily that market access conditions have been difficult for African countries and companies, especially for Eurobonds, primarily due to risk aversion on tough economic conditions and pricing due to higher rates on offer in developed markets.
"The risk premium is also being applied in domestic markets," he noted.
“The market access conditions have been quite difficult specifically for Eurobond, with sub-investment grade assets even more challenging. Africa is predominantly sub-investment grade,” said Asante.
“When someone can get five or six percent in the US then it becomes more challenging to convince them of a similar yield on an African asset. Therefore, for Africa to achieve a lower cost of funding, you almost need to wait for the US to turn the curve.”
In the US, the Federal Reserve has progressively raised its benchmark rate, to the current range of 5.25 -5.5 percent, even though inflation has eased in the country. The most recent increase was seen in July, at 0.25 percentage points.
The sharp hikes—from 0.25- 0.5 percent in March 2022— have seen issuers like Kenya struggle to issue a sovereign bond in the past one year due to concerns about the high rate demands by potential lenders.
The country has instead leaned on concessional lending by Bretton Woods institutions and bilateral agreements for external funding.
Kenya needs to refinance its maturing $2 billion 2014 Eurobond by June next year.
Among the other African issuers, Zambia has a $1-billion Eurobond also due next year, while Angola’s $1.5 billion bond floated in 2015 is due for retirement in 2025, but a third has been partially redeemed through a buy-back.
To get around the high cost of financing, Asante said that sovereigns need to diversify their source of loans.
Getting more lenders to the table will also help even out supply and demand, thus tightening the premium being paid from a real yield perspective.
Other than refinancing existing debt, the Kenya government has also recently announced an expansion of its external borrowing plan to carry the bulk of funding the current fiscal year’s budget deficit.
Last month, the Central Bank of Kenya disclosed that the National Treasury had cut the net domestic borrowing target from Ksh586.5 billion ($4 billion) to Ksh316 billion ($2.2 billion).
The Ksh270.5 billion ($1.9 billion) difference was transferred to the external target, raising it to Ksh402 billion ($2.8 billion) from Ksh131.5 billion ($900.7 million) previously.
The enhanced external funding, the monetary regulator said, will be largely concessional, but there is also some to be accessed that will be on commercial terms.