Investors snapped up bonds from Africa last year: a string of sovereigns including Ghana, Rwanda and Nigeria tapped the market as money managers hunted for yield.
The yields on those bonds are now mostly higher, ranging between 6% and 9%, propelled by repeated bouts of emerging-market turmoil. But investors eyeing Africa’s potential opportunities must navigate the two great threats haunting markets: the U.S. Federal Reserve and China.
Last summer, when the Fed merely started talking about reining in its quantitative easing program, emerging markets wilted, and African bonds didn’t escape the turmoil. Ultimately, however, the gradual end of loose monetary policy at the Fed shouldn’t detract from Africa’s big lure for investors: growth, powered by good demographics, macroeconomic stability and economic overhauls.
Since the lost decades of the 1980s and 1990s, when growth averaged 2.6% in sub-Saharan Africa according to the International Monetary Fund, the acceleration has been sharp. Growth between 2000 and 2012 averaged 5.5% for the same region. The IMF forecasts growth of 6.1% in 2014 and 5.8% in 2015. Debt levels are now low as a share of gross domestic product.
But China, the other big factor worrying investors, could yet cast a shadow on the African outlook. Trade with China rose to around $200 billion in 2012 from $9 billion in 2000, according to African lender Ecobank, fueled by exports of commodities. The recent dip in Chinese growth indicators has fanned investor fears, although the move appears only modest. Still, a sharp slowdown in China would be bound to weigh on African growth, and test African governments’ ability to overhaul their economies.
The market is, however, starting to discriminate between borrowers. In last year’s selloff, bonds issued by Ghana and Zambia suffered; now, with the Fed actually cutting its bond purchases, they have been hit again. Both countries have troubling fiscal situations, with swollen budget deficits. Ghana was last week forced to raise rates to 18% and introduce foreign-exchange controls to defend its currency. Nigeria’s bonds have performed relatively well, but the country suffers from corruption and is vulnerable to oil-price developments.
Others have fared better. Take Rwanda, which sold a $400 million bond with a yield of just 6.875% in May 2013, drawing orders for nearly eight times that amount.
Rwanda’s bond price fell sharply in last year’s turbulence, reaching just under 85 cents on the dollar by September. But now, its bond trades around 95.5—and has been relatively stable so far this year.
Last summer’s move had little to do with Rwanda’s credit quality, and more to the mass exodus from emerging-market bonds sparked by the Fed. Indeed, Rwanda won a positive rating outlook from Fitch in August.
Bonds issued in December by Gabon, which runs a large current-account surplus, have climbed even during the latest emerging-market wobbles.
Africa isn’t insulated from worries about global growth or Federal Reserve policy. But some countries may offer better shelter than others.