Why African Bond market taste bitter right now

The sell-off in US government bonds is upending everything from stocks to the African Eurobond market, as investors readjust their portfolios amid rising Treasury yields at the highest levels in about 16 years.

The US Federal Reserve recently confirmed its hawkish rhetoric, which poses problems for African bond issuers, who will face increasing debt repayments.

The decline in the region is mainly due to external factors.

Falling risk appetite in global markets, weak oil production in frontier markets, and rising interest rates in the United States have pushed investors out of the Sub-Saharan region and into safer and more profitable U.S. Treasury bonds.

Benchmark 10-year U.S. Treasury yields, which move inversely to prices, are near levels last seen in 2007, after a sell-off fueled by the Reserve’s hawkish outlook.

There were no African sovereign Eurobonds issued in Q2 2023. This follows a quiet first quarter.

There has been an overall drought in Eurobond issuance in Africa since the US Fed began its interest rate hike cycle.

Nigeria does not intend to issue Eurobonds in 2023 unless market conditions improve due to bond prices being too high for African countries.

Most African countries also have high debt-to-GDP ratios.

They are also spending a larger proportion of their income to fund debt service, which is unsustainable.

Market access has been difficult for African countries and companies, especially for Eurobonds, mainly due to risk aversion related to the difficult economic environment and interest-driven prices.

African countries also have difficulty accessing international markets. This is partly explained by the negative perception of risk in Africa, reflected in sovereign credit ratings.

In the first half of 2023, negative rating trends, including downgrades and negative outlooks, continued.

This year alone, Standard & Poor’s, Moody’s Investor Service and Fitch Group downgraded the ratings of Ghana, Nigeria, Kenya, Egypt, and Morocco, citing the government’s growing financing needs and pressure from the foreign policy “wall”. upcoming Eurobond deadline, combined with poorly structured international terms

Additionally, global credit rating agencies downgraded ratings based on “weakening external liquidity position” due to unfavourable exchange rate trajectory, rising debt servicing costs and high yields on the Eurobond financial market.

Foreign exchange earnings have been affected in many countries due to reduced export demand in the region.

The World Bank’s latest Africa report revealed that Nigeria’s naira, Angola’s kwanza, lost almost 40% in 2023, making it one of the worst-performing currencies in Sub-Saharan Africa, causing inflationary pressures across the continent as import prices rise.

This situation, combined with slowing growth, leaves policymakers facing difficult choices as they must compromise between controlling inflation and a still fragile recovery.

This situation, combined with slowing growth, leaves policymakers facing difficult choices as they must compromise between controlling inflation and a still fragile recovery.