Are Eurobonds reading data right?

National Treasury building. FILE PHOTO | NMG

By TONY WATIMA
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Summary

• Seychelles was the first African country to issue a Eurobond in 2006 and in the past few years, many African countries have followed suit.
• Now, despite Eurobonds being a source of finance, the bond market ideally is an indicator of the macro-economic performance of these economies.
• Running good current account and fiscal deficit as well as enjoying stable political outlook are the variables that drive favourable yields of the bonds.

In the last 10 years, Eurobonds have become a source of financing for African economies. A number of them have borrowed heavily in the international bond market, as they move away from commercial syndicated loans that were the preferable option previously.

Seychelles was the first African country to issue a Eurobond in 2006 and in the past few years, many African countries have followed suit.

Now, despite Eurobonds being a source of finance, the bond market ideally is an indicator of the macro-economic performance of these economies. Running good current account and fiscal deficit as well as enjoying stable political outlook are the variables that drive favourable yields of the bonds.

But this has not been the case going by the recent yields we have been seeing from African Eurobonds, raising the question; Is the international bond market communicating the right information about the risks of African economies? Or is the international bond market receiving the right information about the risks of African economies?

Let's look closer home. Kenya has been running poor current account and fiscal deficit but that has not reflected in its Eurobonds performance. Kenya's Eurobonds have been handing investors one of the best returns in Africa in the past two years in a period which the country’s public finance record has been getting worse. During the same period Kenya's debt has moved to an unsustainable level.

So, is there an information and agency problem with African economic status and the international bond market?

This observation was strengthened when Bloomberg last week published an article about how Ivory Coast's Eurobonds are handing investors the best returns in Africa even as the country is embroiled in a heavily disputed election.

President Alassane Outtara has secured a controversial third term in an election that saw the main opposition boycott the election. The opposition has announced that it will not recognise Outtara’s victory, sought to push for a parallel transitional government and asked the military to intervene.

In the recent development, opposition figures have been arrested, with some having their houses surrounded by authorities precipitating a political crisis. But at the international bond market, Ivory Coast’s Eurobonds have returned the most among peers on the continent at 6.9 percent like the political risks of the country are not linked and will not affect the economy which is surprising. Guess who is next? Kenya with 6.0 percent, and Ghana at 4.4 percent.

Informational and agency problem has been one of the concerns raised about why African economies not getting favourable credit ratings, according to an analysis done by Mishek Mutize a consultant with African Union – African Peer Review Mechanism, on supporting countries on their engagement with international credit rating agencies.

Credible macroeconomic data and accurate information about African economies is affecting their business confidence standing and market sentiment.Most times investors become speculative and rating agencies make assumptions because of this informational problem. For example, South Africa was downgraded by Standard & Poor over its big coronavirus package which the rating agency believed could increase the country's debt burden to unsustainable levels.

Ghana was also downgraded by the same agency because of increasing its fiscal expenditure. Moody’s downgraded Cameroon, Ivory Coast and Senegal because of their participation in the G20 Debt Service Suspension Initiative. In his analysis, these downgrades happened because the governments failed to make data available or communicate their policy direction to mitigate such risks.

So, is it a case of the international bond market not providing investors with accurate outlook position of these economies, or investors simply riding on optimism and are not averse to the macroeconomic risks of these economies?