- African nations struggle with high borrowing costs due to attractive US rates.
- Risk aversion and challenging economic conditions hinder market access for Eurobonds.
- Sovereigns seek diversification of funding sources to mitigate high financing costs.
Due to the favorable rates being offered on the US financial market, African sovereigns will continue to confront high borrowing costs in the short term, making it more difficult to retire maturing Eurobonds for numerous nations over the next two years.
According to George Asante, the managing director of Citi and head of markets for Africa, who disclosed to the Kenyan Business news publication, The Business Daily, market access has been difficult for African nations and businesses, particularly for Eurobonds, primarily because of risk aversion in light of the challenging economic climate and pricing because of the higher rates offered in developed markets.
“The risk premium is also being applied in domestic markets,” he noted. “The market access conditions have been quite difficult specifically for Eurobond, with sub-investment grade assets even more challenging. Africa is predominantly sub-investment grade,” Asante continued.
“When someone can get five or six percent in the US then it becomes more challenging to convince them of a similar yield on an African asset. Therefore, for Africa to achieve a lower cost of funding, you almost need to wait for the US to turn the curve,” he added.
Even though inflation has decreased in the US, the Federal Reserve has gradually increased its benchmark rate to the current level of 5.25 to 5.5 percent. The most recent rise, 0.25 percentage points, was seen in July.
Concerns about the high rate requests made by potential lenders have made it difficult for issuers like Kenya to issue a sovereign bond in the previous year as a result of the steep hikes—from 0.25 to 0.5 percent in March 2022.
Instead, the nation has relied on bilateral agreements and concessional loans from Bretton Woods organizations. Kenya must refinance its $2 billion 2014 Eurobond by June of the following year.
The other African issuers include Zambia, which has a $1 billion Eurobond due the next year, and Angola, whose $1.5 billion bond was issued in 2015 but has already had a third of its value partially redeemed through a buy-back. According to Asante, sovereigns must diversify their lending sources in order to avoid the high cost of financing.
The National Treasury reduced the net domestic borrowing goal from Ksh586.5 billion ($4 billion) to Ksh316 billion ($2.2 billion), according to information released by the Central Bank of Kenya last month.
The difference of Ksh270.5 billion ($1.9 billion) was shifted to the external objective, increasing it from Ksh131.5 billion ($900.7 million) to Ksh402 billion ($2.8 billion).
The monetary regulator stated that most of the increased foreign money will be on favorable terms, but part of it may also be accessible on commercial terms.
