African Eurobonds tipped to fetch better returns this year

Eurobonds from sub-Saharan Africa will perform better this year even though debt levels in some parts of the region are ballooning, as diminishing prospects for further US interest rate hikes support demand, a Reuters poll found.

All but one of 10 analysts surveyed this week said it would be a better year than last, but opinion was split on which country would dominate the overall improvement.

“It is likely that African Eurobonds will offer better returns this year after a negative performance in 2018,” said Samir Gadio, head of Africa strategy at Standard Chartered. “This probably reflects their high-yield status, cheap valuations at the end of 2018 and lighter investor positioning at the time.”

The US Federal Reserve on Wednesday signalled its three-year drive to tighten monetary policy may be at an end amid a suddenly cloudy outlook for the US economy, an announcement that could support investor interest in Africa’s debt market.

Nigeria’s 30-year $460 million (Sh46.4 billion) Eurobond, issued in November as part of a $750 million (Sh75.7 billion) fundraising, currently yields a healthy 8.169 per cent.

In a positive sign for the region, investment bank JPMorgan raised its exposure to emerging market local bonds and currencies after the Fed shifted to a more dovish stance.

Aly-Khan Satchu, head of Rich Management in Nairobi, said a lot depends on the Fed’s rate trajectory.

The US central bank held interest rates steady on Wednesday and discarded its promise of “further gradual increases”, instead saying it would be “patient”.

Top African crude exporters such as Nigeria and Angola have suffered in recent years from oil price weakness that has curbed into much-needed revenues and exposed weaknesses at state-owned companies.

The poll listed Angola, Nigeria and even heavily-indebted Zambia as places to look for value in 2019 after a year of disappointing returns for net oil exporters compared with importers on the continent.

Nigeria raised $2.86 billion (Sh288 billion) in Eurobonds three months ago to help fund its budget deficit, in a sale that was three times oversubscribed.

Angola, Africa’s second-largest crude producer, is sizing up a shot at the bond market after securing an International Monetary Fund deal.

Oil prices averaged just over $100 per barrel in the first half of the past decade but fell to half that from mid-2014.

A Reuters survey on Thursday forecast Brent crude oil futures to average $67.32 a barrel this year, down from $69.13 projected in December.

Analysts said African Eurobonds had already posted impressive returns early this year and were generally performing better than other emerging markets.

But even if US-China trade talks yield positive results and better risk sentiment, Gadio warned that tighter spreads and supply pressure could constrain bond gains later this year.

Kenya is planning to issue a bond to help fund its 2018-2019 budget deficit. A banking source valued it at $2.5 billion (Sh255 billion).

Ivory Coast is planning to raise up to 1.4 trillion CFA francs ($2.5 billion) this year on regional and international markets. “Investors will likely look for pockets of relative value in countries that still trade relatively wide to immediate peers and/or have room to outperform. This appears to include Nigeria, Cote d’Ivoire and Cameroon,” said Gadio.

Angola, Kenya and Mozambique were cited in the poll as likely borrowers this year, adding to their already hefty debt burdens, followed by the Republic of Congo and Zambia.