Africa's bond rush: Handle with care
African governments must use bond revenues to address critical growth constraints, while global conditions are in their favour.Sub-Saharan Africa has a $7bn potential bond pipeline in 2013. Zambia and Rwanda recently issued heavily over-subscribed bonds, and analysts anticipate issuances from Nigeria, Angola, Ghana (its second), Kenya and Zambia (again). Tanzania has hired a rating adviser as a precursor to a bond issuance in due course, with Mozambique an outside bet.
This is only partly a response to the continent's robust growth. Low yields elsewhere (especially in the eurozone and the US) - as well as excess global liquidity due to quantitative easing - are the global trends pushing bond-hunters to Africa. "There is a lot of excess liquidity internationally and some of that is being used to buy high-yielding assets in Africa," says Mason Cranswick, director of fixed income credit at Credit Suisse.
So the current window of opportunity will not last forever, meaning funds raised must be used by African governments to address critical growth bottlenecks such as infrastructure; highlighted by both recent issuers as an investment priority. "Once liquidity starts drying up, there is a risk that some of the funds will be pulled from Africa. But I think if we keep our momentum we can still attract that capital," says Mr Cranswick. "If we can keep up with the infrastructure, I think we can stay attractive with the rest of the world."
While government bonds could help address Africa's enormous infrastructure deficit, it is no magic bullet. "The binding constraint is debt sustainability issues around these countries," says Mthuli Ncube, chief economist for the African Development Bank. Rwanda could not go much further than $430m, he says. Regional infrastructure bonds can supplement government's efforts, and innovative moves - such as Ethiopia's diaspora bond to raise funds for the Renaissance Dam - can also help. But in the longer term, says Mr Ncube, "what is needed is a deepening of domestic capital markets. That is a process that requires an incredible sequence of reforms.”
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