Will Chinese 'Panda Bonds' Spread in Sub-Saharan Africa?
In early April, South Africa issued its first sovereign bond in over two years. The ten-year, $1.25 billion bond was oversubscribed by a factor of two. This is the first international bond issued by a sub-Saharan African nation in 2016. It is likely to be followed by Kenyan, Nigerian and Ghanaian issuances.
The past two years were the most active in the history of sub-Saharan Africa’s sovereign bond issuances. But, due to the state of international markets in 2016, the price of issuing bonds has been too high (near and above 10 percent) for most African countries. These sub-Saharan countries are now trying to take advantage of an upswing in emerging markets, translating to potentially cheaper issuances. Because these “cheaper issuances” are still high comparative to current U.S. rates, there is significant interest in sub-Saharan markets.
South Africa took full advantage of this interest, and issued its bond during what might be a brief calm in the storm. After months of political uncertainty, including the potential impeachment of South African President Jacob Zuma, the rand (South Africa’s national currency) rallied to a four-month high. The bond was also issued before a potential rating downgrade. (It is feared that Standard & Poor may soon lower South Africa’s rating to junk status). These factors allowed the South African Treasury to issue their recent bond at a relatively low rate (for sub-Saharan Africa) of 4.875 percent.
Other sub-Saharan nations are not likely to get such a low rate.
The Kenyan Treasury was recently in London trying to gauge interest in a potential $600 million Eurobond issuance. It is rumored that they are looking to obtain a coupon rate of 8.25 percent (nearly twice that of South Africa). Along with this possible bond issuance, Kenya is concluding a $600 million loan agreement with China. Ghana has also recently met with investors in London. There is talk that it is hoping to raise up to $1 billion. Though the rate for this potential offering is unknown, Ghana’s last bond issuance in October 2015 was at a coupon rate of 10.75 percent.
Nigeria, facing an $11 billion budget deficit, needs to raise money, but with the drastic decrease in oil revenue, it can’t afford to issue bonds at such high rates. In addition, the decreasing value of the naira (Nigeria’s national currency) makes it impractical to issue debt in the stronger dollar and euro markets. But, despite the obstacles, the Nigerian government believes that it must build out the country’s infrastructure if it is to develop a more diverse economy. As a result, the Nigerian government is looking for the “cheapest possible money” and turning to other markets—such as those of the Japanese and Chinese—to issue debt. There is talk that Nigeria may issue a renminbi (China’s national currency) denominated bond on the Chinese domestic market, a so-called "panda" bond. If this were to happen, Nigeria would be the second country, after South Korea, to do so.
Despite the current reprieve in emerging markets, the majority of sub-Saharan countries are facing a financial market that makes it extremely costly to borrow. At the same time many of these countries are at a critical juncture where they must invest in public works and infrastructure projects to further develop their economies. Because of this, we are likely to see other African states emulate Nigeria and turn to new and innovative ways to raise capital.
Allen Grane is a research associate for the Council on Foreign Relations Africa Studies program. This article first appeared in Africa in Transition.
Image: Wikimedia Commons/J. Patrick Fischer.