Regional Eurobond Yields To Rise

Although Sub-Saharan African (SSA) yields have broadly been on the decline during the first half of 2014, we remain of the view that the asset class offers little value. We expect yields across the board to rise over a one to two year time horizon with issues from Zambia and Ghana particularly at risk. We also believe that structural weaknesses in Gabon's economy and political risk in Côte d'Ivoire ahead of the 2015 election pose risk to dollar denominated debt.

Respite For Global Yields To Be Short-lived

Declines for SSA Eurobond yields have been part of a move lower for emerging market dollar denominated debt during the first six months of the year. As the chart below illustrates, yields on instruments from Lebanon to Turkey to Latin America have edged lower during the first six months of the year.

Yield Declines On SSA Debt Not Sustainable
Africa - Yields On Select Eurobonds, %

Although Sub-Saharan African (SSA) yields have broadly been on the decline during the first half of 2014, we remain of the view that the asset class offers little value. We expect yields across the board to rise over a one to two year time horizon with issues from Zambia and Ghana particularly at risk. We also believe that structural weaknesses in Gabon's economy and political risk in Côte d'Ivoire ahead of the 2015 election pose risk to dollar denominated debt.

Yield Declines On SSA Debt Not Sustainable
Africa - Yields On Select Eurobonds, %

Respite For Global Yields To Be Short-lived

Declines for SSA Eurobond yields have been part of a move lower for emerging market dollar denominated debt during the first six months of the year. As the chart below illustrates, yields on instruments from Lebanon to Turkey to Latin America have edged lower during the first six months of the year.

Emerging Market Dollar Debt Yields Have Been Broadly On The Decline
Emerging Markets - Spread Of Select Dollar-Denominated Yields Over US 10 Year Treasures, basis points

Although there are obviously idiosyncratic factors at play, the broad move lower is a result of a reinvigoration of investors' hunt for yield as markets price in the fact that US policy rates may stay lower for longer than was expected over the course of 2013. This adjustment in expectations has come on the back of weak first quarter data for the US economy and a more dovish tone from Federal Reserve Chairwoman Janet Yellen than that of her predecessor.

However, BMI's global strategists do not believe that the larger-than-expected contraction in Q114 signals fundamental weakness in the US economy (see 'GDP Contraction Belies Major Improvements In Economy' from May 30). Although recent rallies in US treasuries mean that yields could stay lower for longer than we previously expected, the fact that the US recovery remains on track - Q114 data aside - means that the long-term trend for yields will be upwards. This means that interest rates on global emerging market dollar debt are likely to rise in tandem with US treasury yields.

SSA Not Immune, Some More At Risk Than Others

Sub-Saharan African Eurobonds will not be immune to this dynamic and we are expecting yields on dollar debt from the region to rise over the medium to long term. We therefore think that the asset class offers little value in general at current levels.

We believe that Zambia and Ghana are particularly at risk given weak macroeconomic fundamentals and uncertain policy environments. In the case of the former, although the government's appeal to the IMF for technical oversight has provided some short-term confidence and led to a recovery in the kwacha, the fiscal deficit is large and unlikely to fall quickly. Furthermore, the government's recent declaration that mining taxes will be reviewed has led First Quantam to announce the deferral of USD1bn worth of investment until there is more clarity on policy.

Recent Declines Are Not Justified By Fundamentals
Africa - Spread Of Select Dollar-Denominated Yields Over US 10 Year Treasures, basis points

As for Ghana, we believe that recent declines in yields are based on the market's expectation that IMF assistance is likely and that this will help to shore up the country's macroeconomic fundamentals. However, the government's recent intimation that it would issue a further Eurobond is an indication of the authorities' unwillingness to ask for multilateral assistance. We therefore believe that the issues underpinning Ghana's macroeconomic frailty - fiscal and current account deficits and a weakening currency - will persist and that this will drive yields on dollar debt higher.

In Gabon, oil production is facing a secular decline as hydrocarbon reserves are depleted. Given that the authorities rely on oil for 60% of total fiscal revenues, this will threaten the budget position and the government's long-term ability to service its obligations. This is a longer term issue and we believe that the Eurobond maturing in 2023 is more likely to reflect these weaknesses than the issuance expiring in 2017. As for Côte d'Ivoire, although macroeconomic fundamentals are strong and we expect them to remain so, we believe that the election scheduled for October 2015 could threaten the political stability that has helped to make the country a darling of international investors. Given that much of the good news about the economy is already priced into the 2032 bond, we believe that risks are firmly to the downside.

Read the full article

This article is tagged to:
Related sectors of this article: Economy, Finance, Fixed Income, Economic Policy, Debt Policy, Investment Climate, External Debt
Geography: Africa, Gabon, Ghana, Nigeria, Zambia
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.