For bond investors, Africa’s been a happy hunting ground this year.
Its local-currency and dollar securities easily outperformed those of emerging markets overall as investors piled into a continent offering high yields and starting to recover from the commodity bust of three years ago.
But risks abound, among them policy tightening in advanced economies, local and global politics, weakening currencies and another fall in oil prices. And then there is credit risk.
This year, Mozambique and Republic of Congo missed Eurobond payments, while countries including Cameroon and Zambia agreed to or began talks on bailouts with the International Monetary Fund. And since Namibia and South Africa were downgraded to junk, the continent has been left without any investment-grade foreign-currency issuers.
Christine Lagarde, for one, thinks Africa’s debt problems “could very well” worsen in 2018 as the dollar appreciates and the US raises interest rates, according to an interview with Quartz magazine this month. The IMF’s managing director said yield-hungry bond investors “were so eager to lend that I don’t think they were very serious about assessing the risks and assessing their exposure.”
Africa’s debt is already becoming less attractive on a relative basis. US 10-year yields rose to their highest in nine months this week, which narrowed African dollar-spreads to 347 basis points, the lowest in more than three years, according to Standard Bank Group.
Here’s a guide to what investors should watch for in ten key African markets in 2018:
Investors are waiting on the Opec member to devalue its currency, the kwanza, to help ease a shortage of dollars and revive what was, until the 2014 oil crash, one of the world’s fastest-growing economies. Standard Bank says they may have to wait until after the government of new President Joao Lourenco presents its budget in mid-February.
Elections in the first half of next year will signal whether President Abdel-Fattah El-Sisi, or his successor, will carry on with the deep economic reforms that have gone down well with portfolio investors, but left ordinary Egyptians reeling from high inflation.
Ghana’s economy grew 9.3% in the third quarter as oil production increased. If sustained, it would mark a turnaround for the West African nation, which has been been under an IMF program since 2015 and saw its growth plummet to the lowest in more than a quarter-century last year as it enacted austerity measures.
Kenyans and foreign investors will hope that East Africa’s biggest economy finally ends a political crisis triggered by this year’s disputed elections, the results of which the defeated main opposition party still hasn’t accepted. Until it does, President Uhuru Kenyatta will struggle to revive a slowing economy and encourage more investment.
The southern African nation has been ravaged by a financial crisis caused by the government taking on too much external debt, much of it in secret. It defaulted on a $727 million Eurobond in January and still hasn’t begun formal restructuring talks with creditors including New York-based hedge fund Greylock Capital Management LLC. While the government wants to start negotiations, bondholders say that Mozambique has the money to pay them back and that it should turn to other lenders for a haircut.
Nigerian politicians are already gearing up for elections in early 2019. President Muhammadu Buhari, who is 75 and spent many months this year in London getting treatment for an undisclosed illness, is yet to say if he’ll run again. Either way, any signs that officials are putting much-needed reforms on hold to concentrate on the vote may unnerve investors in an economy that’s still struggling to recover from last year’s recession.
Republic of Congo
Will it default again? The oil-producing central African country, which was about a month late on a coupon earlier this year, is considering halting payments on some debts, its prime minister said in October. The next coupon on its $363 million Eurobond is due at the end of 2017. The security has surged 15 cents to 88 cents on the dollar this month as investors bet the government is closer to striking a deal with the IMF.
Investors will be watching Cyril Ramaphosa, the new leader of the ruling African National Congress, closely. February’s budget will be crucial, signaling whether Ramaphosa, who has prioritised stimulating the economy and stamping out corruption, is able to assert his authority over President Jacob Zuma’s administration and whether South Africa has done enough to avoid more credit-rating downgrades. Investors will also look for any hints as to whether Ramaphosa will try to force Zuma, whose term runs until 2019, to step down early.
The copper producer’s immediate prospects hinge on whether it can get a bailout from the IMF. The kwacha has lost 10 percent against the dollar since July on investor concern that it won’t manage that soon. Without a deal, it’s at risk of financial stress, according to Moody’s Investors Service.
Not a market for bond investors. But Zimbabwe may become tempting for global equity investors once again after Robert Mugabe was ousted as president in November. That could open up the country — once home to one of Africa’s most important stock markets — to much-needed foreign investment.