Oxstones Investment Club™(EM) Zambia’s hugely oversubscribed 10-year bond is likely to encourage other African states to sell debt in the markets
The success of Zambia’s debut ten-year eurobond is likely to encourage other sub-Saharan Africa (SSA) issuers to come to the markets soon, following months of delays in plans by countries including Kenya and Tanzania, according to JP Morgan vice president for emerging markets research Giulia Pellegrini.
Appetite for emerging and frontier market debt has increased as investors seek to diversify away from zero-rate developed countries.
“Zambia’s debut issue was a real success,” Pellegrini told Emerging Markets. “Investors certainly bought into a relatively solid story amid rising copper prices, but it was the extremely supportive technicals that were really the key driver behind the large over-subscription.”
“No doubt other SSA countries will be encouraged by this outcome. Others that have already issued have been saying that they will go back to markets next year,” she added.
The mid-September Zambian issue originally offered $500 million but was raised to $750 million after lead managers and joint book runners Barclays and Deutsche Bank received bids worth an unprecedented $12 billion.
The bond had a 5.37% coupon, which analysts said was priced tight to Ghana – another SSA issuer with a strong natural resource story. Some officials have warned of a bubble in emerging markets debt because of uncertainty in the eurozone. Spanish 10-year bond yields hovered around 5.7% in September.
Zambia is rated B+ by Fitch Ratings and Standard & Poor’s.
Future issuers might have to deal with less benign market conditions, Pellegrini warned.
“The question is whether they’ll be able to count on the same supportive market environment Zambia found a month ago – lots of ‘free money’ chasing any paper, before South Africa’s strikes spooked anybody in the Africa space,” she said.
The IMF’s new World Economic Outlook says SSA, which grew by more than 5% in each of the past three years,“ is expected to continue growing strongly in the near term”, despite negative factors “including the escalation of the euro area crisis”. The WEO commented that “apart from South Africa, financial spillovers from Europe to the region have been modest.”
African Guarantee Fund Chief Executive Felix Bikpo told Emerging Markets that one major obstacle to growth in the African debt market was the fact that the financial markets in Africa, except for a few bigger countries, were not very developed so liquidity was low.
Bikpo believes that governments can raise some money on the domestic markets, but that “the bond market is the future for Africa in the next five to ten years, not today.”
The Zambian government has promised to invest the bond’s proceeds in much-needed projects, mainly in the energy and transport sectors, as annual growth of over 6% is putting heavy pressure on infrastructure.
Rwanda will stick to its plan of launching a $300 million bond by the end of the year, Finance Minister John Rwangombwa told Emerging Markets.
Tags: african bonds, african markets, commodity linked economies, debt market, developing countries, emerging market bond issuances, emerging market debt, emerging market economies, frontier market bonds, local currency bonds, low yield environment, nambia