- Mauro Mecagni, Jorge Canales Kriljenko, Cheikh Gueye, Yibin Mu, Masafumi Yabara, and Sebastian Weber
- Published Date:
- June 2014
This paper showed that a range of macroeconomic, structural, and debt-management considerations need to be met for a successful issuance of sovereign bonds in international markets by sub-Saharan countries. In many cases, there will also be a need for substantial capacity-building efforts. It is advisable that sovereign issuances be carefully planned and prepared, and used as only one of a range of possible financing instruments. In particular, issuance of sovereign bonds should be one of several pillars of broadening government financing instruments, which should also include efforts to develop domestic debt markets and broaden options for infrastructure finance.
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There may consequently be a temptation on the part of some sub-Saharan African countries to increase the level of debt in an environment of favorable financing conditions. Such considerations would need to be evaluated in the context of fiscal and external sustainability and the need for and potential return of investments financed by higher borrowing. Such an analysis is being addressed in country-specific Article IV reports.
The sole exception is South Africa.
In this report, international sovereign bonds are defined as government bonds issued in foreign currency in international jurisdictions.
In 2012, Angola received a seven-year loan (US$1 billion) from the Russian bank VTB. VTB issued a corresponding sinkable loan participation note with a coupon rate of 7 percent.
Including the US$500 million five-year Eurobond offered by Guaranty Trust Bank of Nigeria in May 2011.
In Ghana, the proceeds (US$750 million) from the 2007 Eurobond were spent largely in 2008. Nevertheless, the recorded increase in public investment falls short of the amount, implying the possibility that the bond proceeds may have been allocated for other budgetary purposes.
Senegal saw some delays in the implementation of its energy and highway investment plans, to be partly financed by its Eurobond issued in 2011. Zambia’s debut Eurobond in 2012 is earmarked for its priority energy and road projects. Given the size and complexity of the projects, it may take time before disbursement of the bond proceeds are in full swing.
This benchmarking method is, however, limited by the small sample of reference debt instruments.
A model-based approach also confirms the finding that most sub-Saharan African international sovereign bonds have been currently trading below benchmarks. The model estimates the relationship between secondary markets’ sovereign spreads and “push” and “pull” factors (Gueye and Sy, 2010). The results are confirmed for all the fixed-effect and random-effect methods (Figure 8).
These positive developments help offset in part a history of external sovereign debt default and restructuring in many sub-Saharan African countries (see Das, Papaioannou, and Trebesch, 2012, for a list of all debt restructuring).
Following Zambia’s 2012 sovereign bond issuance, the state-owned Zambian railway operator, the Zambian Road Development Agency, and the municipal government of Lusaka are reported to intend raising additional funds via bond issuances. See also Box 3 on Nigeria’s international bond issuance experience.
Currently, the International Finance Corporation (IFC) offers long-term currency swaps in the following markets: the Ghanaian cedi, the Zambian kwacha, the Ugandan shilling, the Tanzanian shilling, and the South African rand. IFC provides local currency debt financing in three ways: (1) loans from the IFC denominated in local currency, (2) risk management swaps that allow clients to hedge existing or new foreign currency-denominated liabilities back into local currency, and (3) structured finance that enables clients to borrow in local currency from other sources.
To mitigate the risks inherent in a bullet repayment, Gabonese authorities set up an account (at the World Bank) where they intended to deposit annually 10 percent of the principal for the repayment of their 10-year Eurobond. In addition, at times when the bonds were valued at substantial market discount, they used part of these funds to purchase back some of the outstanding bonds.
The recent contrasting approaches of Zambia (issuing at favorable terms after following a best practice process of disclosure and investors’ base preparation) and Angola (taking a commercial bank loan that was on-sold to the secondary market, trading immediately at a significantly lower yield than the coupon rate paid by Angola) is illustrative. Some analysts have also suggested that the features of Tanzania’s recent issuance (absence of a rating, amortizing structure, and private placement) may have resulted in higher borrowing costs.
In countries with an IMF arrangement, a closer look at the implications of a sovereign debt issue on the program objectives may be warranted. Countries with IMF-supported programs are subject to debt limits, which typically limit the scope for non-concessional borrowing. Under these circumstances, a sovereign bond issuance could potentially lead to a violation of the corresponding benchmarks of a performance criterion in some programs.