Paradox of cheaper bonds in ‘unstable’ West Africa

Saturday March 02 2024

Commercial lenders have generally retreated from lending to East Africa over the past few years, while increasing their loans to West African states. PHOTO | POOL


West African countries are recording an influx of investors as their East African peers continue to struggle to access financing from the international markets, even as all projections indicate more economic and political stability in the east.

Despite the political instability, coups and coup attempts, subdued growth, and economic turbulence in West Africa, investor sentiment on the region has improved over the past year, significantly dropping its Eurobond yields as East Africa continues to pay more for its sovereign debts.

Bloomberg data on dollar-denominated bond yields indicates that as West African countries are enjoying rates as low as 8.5 percent, most East African nations are struggling to keep their rates at single digit.

Read: EA central banks take measures to cushion economies

Last week, American credit rating agency Fitch warned that Senegal’s postponed elections and the intentions of four Sahel states to leave the regional economic bloc, Economic Community of West African States (Ecowas), will worsen the region’s economic position.

The International Monetary Fund (IMF) estimates show that inflation in the bloc peaked at 20.3 percent last year, and will drop marginally to 17.2 percent in 2024, which is still much higher than the continental average of 13.2 percent.


But in the East African Community (EAC), excluding latest entrants South Sudan, Somalia, and the Democratic Republic of Congo, inflation is expected to continue easing this year, averaging at 5.6 percent, down from last year’s 6.8 percent.

At the same time, IMF projects that East Africa will grow faster than the Western region this year, as multiple challenges among them coups and political unrest weigh down on economies in the Sahel.

EAC’s growth should accelerate to 5.7 percent this year, up from last year’s five percent, but Ecowas’ will remain subdued at 4.1 percent, albeit an improvement from last year’s 3.3 percent, according to the IMF’s regional economic outlook for sub-Saharan Africa published in October 2023.

The African Development Bank’s (AfDB) projections for 2024 paint a similar picture. Based on AfDB’s forecast in the African Economic Outlook published last week, East Africa’s growth will hit 5.8 percent this year, while West Africa’s will only rise slightly to 4.2 percent.

Read: External shocks dim EA economic growth prospects

While West Africa is home to the fastest growing economies on the continent, with Niger, for example, expected to grow at 11.4 percent this year – the highest on the continent -- their debt levels are projected to remain elevated, implying increased servicing costs and potentially higher risk of default.

Ghana’s default last year appears to have had little impact on investor sentiment on the wider region, compared with the trickle-down impact of Ethiopia’s default late last year on peers in East Africa. Cote d’Ivoire, for example, issued a $2.6 billion Eurobond in January, at a yield of 7.87 percent, while Kenya’s $1.5 dollar-denominated bond issued just days later had to offer 9.75 percent to entice investors.

Kenya, which has been grappling with high debt-servicing costs as yields on its Eurobonds kept rising last year, has maintained a negative credit rating from American rating agencies, despite the successful buyback of part of the $2 billion Eurobond maturing in June this year.

“Kenya’s sovereign external financing requirement has increased sharply in the current fiscal year ending June 2024 to about $5.5 billion (5.4 percent of GDP), up from $2.6 billion in FY23 (2.8 percent of GDP), mainly due to higher principal repayment including the $2 billion Eurobond repayment due in June 2024,” rating firm Fitch said after maintaining Kenya’s credit rating at ‘B,’ which is generally undesirable.

“A weaker exchange rate (down about 4 percent against the dollar in FY24 to date) also adds to Kenya’s debt servicing challenges, as half of its government debt is foreign currency denominated.”

Uganda and Tanzania, although rated slightly better than Kenya, also have negative outlook, with Fitch attributing it to external liquidity challenges and weak currencies.

Read: Uganda dominates East Africa's FDI share

Commercial lenders have generally retreated from lending to East Africa over the past few years, while increasing their loans to West African states.

For example, while East Africa currently holds $40.35 billion, 0r 24 percent, of the $167.14 billion total Chinese loans that have come to Africa since 2000, this is slowly changing.

Data collated by the Global Development Policy Centre of Boston University, indicates that between 2021 and 2022, 86 percent of Beijing’s credit to projects in Africa between 2021 and 2022 went to West Africa.

Flight of foreign investors

At the same time, Nairobi Securities Exchange, the region’s largest bourse, has significantly lost foreign investors. As of December last year, foreign investor purchases had fallen to a record low of Ksh1.3 billion ($191 million), as more investors fled the market.

Senior research associate at Nairobi-based Standard Investment Bank, Stellar Swakei, attributes this phenomenon to investors looking beyond the figures into the real situation in individual economies, which informs their sentiment.

“GDP figures are not projecting the real pictures of the respective economies and investors can see that. The growth rate projections for Kenya, for example, do not reflect the difficult background against which it could be achieved,” she said.

“We are seeing the numbers but people on the ground are complaining about the high cost of living, which is driven by several factors including the low agricultural production early last year, and currency depreciation.”

Ms Swakei avers that the rapid depreciation of currencies in East Africa, which are mostly pegged to the dollar, has significantly eroded investor confidence over the last few years.

Notably, West African currencies, especially the West African Franc, which is pegged on the Euro, have remained relatively stable in the same period.