Innovation will be key for African sovereigns in the international bond markets in 2023
Start of the year sees storm clouds clear. By Karim Elzein, head of Middle East, Türkiye and Africa Debt Capital Markets at Societe Generale.
International debt capital markets have experienced significant growth and development over the past few years for African borrowers. Until 2022, an increasing number of African sovereigns accessed the international bond markets, raising funding for, among others, infrastructure and economic development.
In 2022, the combination of tightening monetary policy, supply chain issues and geopolitical strains made for the most difficult conditions on record for debt capital markets globally. Issuance volumes dropped across all market sectors, decreasing around 30% year-on-year globally, over 50% in Central and Eastern European, the Middle Eastern and African region and around 80% in Africa as a whole.
The volatility of 2022 drove African sovereigns to consider four main avenues for international funding:
1. Approaching the international bond markets (Nigeria, Angola and South Africa)
2. Accessing alternative sources of capital as they anticipate bond market improvement
3. Raising (concessionary) funding from the official sector and multilateral development banks
4. Private debt restructuring and/or International Monetary Fund bail-out (Ghana)
The start of 2023 saw the storm clouds start to clear, driving optimism for the rest of the year. Underlying interest rates and credit spreads dropped considerably from mid-October 2022, suggesting more attractive funding costs for issuers. Outflows from emerging market bond funds also started to reverse and the last weeks of the year saw around $2bn of inflows. This positive tone should continue and make for a more active primary bond market for African sovereign borrowers.
Key themes for African sovereigns in the bond market in 2023 include:
1. Renewed bond issuance activity. EM investors are sitting on elevated cash balances and attractive headline interest rates will incentivise investors to deploy said cash balances. EM primary bond issuance in early 2023 has been very successful as demonstrated by Mongolia’s $450m five-year bond (priced at 8.95%) which attracted a $3bn orderbook.
2. Official sector funding. Given the price-efficiency, sovereigns are expected to increase their tolerance thresholds to non-financial requirements associated with official sector funding to saturate funding via this channel.
3. Delaying investments or discretionary projects to reduce foreign funding requirements.
4. Precautionary credit facilities from the International Monetary Fund, such as for Egypt, Georgia, Serbia and Armenia.
5. Private debt restructurings and IMF bailouts for the very few sovereigns in particularly acute fiscal situations with no access to capital markets or concessionary financing.
We also expect the market to be conducive to innovation in different areas of the capital markets:
1. Partially/fully guaranteed bonds. Several multilateral development banks have such schemes available to sovereigns to reduce all-in funding costs. Low funding costs available to African sovereigns over recent years provided little justification to undertake an arduous execution process, although current funding costs may justify this.
2. Sukuk issuance for sovereigns with an ‘Islamic nexus’. As demonstrated by Türkiye in 2022 (which raised $5.5bn through Sukuk issuance), cash-rich Islamic investors remain hungry for investment opportunities and yield.
3. Liability management exercises. While 2023 does not present a significant African sovereign bond maturity cliff, there is a much larger amount due in 2024. LM offers investors the option to roll rather than increase exposures – allowing borrowers to de-risk trades through sizeable lead orders. LM also offers sovereigns the ability to extend maturities at limited incremental cost.
4. ESG in the capital markets. Africa is generally well regarded by the international investor community on ESG. Societe Generale is therefore confident that we will see African sovereigns access the incremental liquidity offered by ESG-linked bonds and the more novel, debt-for-nature swaps. Societe Generale is one of the most active banks arranging bonds in the debt capital markets. The combination of our global credentials, strong African commitment (with an on-the-ground presence in 17 countries in Africa and ‘Grow with Africa’ strategy) and track record of innovation has made us a key debt capital market partner for African sovereigns in the past, which will continue in 2023 and beyond.
This article first appeared in OMFIF’s Public Sector Bond Market Outlook Report, available here