South Africa is due to repay $1.5bn in bonds this month

Nations in Sub-Saharan Africa have been locked out of international debt markets for 22 months now, and investors increasingly are betting the drought will soon end as countries seek funding for a slew of principal payments coming due this year and next.

South Africa is due to repay $1.5 billion in bonds this month, while Kenya has a $2 billion maturity in June. Second-half principal repayments will then come from Senegal, Ivory Coast and Gabon. Ethiopia was slated for December, but defaulted last month.

It’s already been a long wait for nations that need the funding, and for high-yield investors eager for new deals. The drought in issuance began in April 2022 and lasted throughout 2023. The last time Sub-Saharan African countries spent a full year without a single international bond sale was 2009, in the midst of the global financial crisis.

“There has been limited supply from higher-yielding EM countries so the demand may be robust for well-priced new issues with positive fundamentals,” said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management Americas Inc. But issuance could be limited by still-elevated borrowing costs for most sovereigns in Africa, she said.

One of the main contenders to try and end the lockout is Kenya.

The spread between yields on Kenya’s dollar debt and US Treasuries has narrowed by more than 400 basis points since reaching a record high last year. It closed at 599 basis points on Wednesday, according to JPMorgan Chase & Co. data, down from its high of 1,028 in April.

“Kenya could well be the first to issue this year and one would imagine that market demand would be forthcoming,” said Simon Quijano-Evans, chief economist at Gemcorp Capital Management in London. If markets perceived that a new bond issue was coming, that could also help pull down spreads from current levels as it would imply an improvement in the country’s financial position for 2024, he said.

“Combining that with a contraction in UST yields could help pull all-in yield for a 10-year USD bond closer to the 9% mark at some stage in the first half,” Quijano-Evans said. Kenya’s debt due in June currently trades at a yield of 15.8%.

Other contenders to end the borrowing drought include South Africa, Angola and Nigeria, according to Morgan Stanley. Each could tap the market at yields around 10%.

South Africa specifically could issue as much as $2.5 billion in the second quarter, “but issuance of this amount will be very dependent on external financing conditions,” strategists including Neville Mandimika said in a note to clients.

Moody’s Caution
Still, Moody’s Investors Service says the outlook for Sub-Saharan African sovereign issuers is negative this year. That’s a reflection of risks from large debt burdens and the difficulties many countries will have refinancing at rates they can afford, analysts including John Walsh wrote in a report Wednesday.

Ethiopia’s default on Christmas was a signal to international investors and trade partners of the heightened risk, said Robert Besseling, chief executive of Pangea-Risk, an advisory firm focusing on analysis of African economies.

“Many will remain locked out of international debt markets, while for many interest rates will be unaffordable,” he said.

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