Performances:
The year 2023 ends on a positive note for the financial markets, with a strong rebound in equities and bonds driven by the marked decline in inflation and expectations of significant rate cuts in the USA and Europe.
African Eurobonds, represented by the EMBI Africa index, are up +14,83% over the year, despite the high volatility inherent to the asset class and some credit events affecting certain issuers such as Ethiopia, Zambia and Ghana. African Eurobonds outperformed emerging bonds and all other bonds asset classes in USD. This performance is largely due to the attractive carry of the asset class (Chart 1), with US 10-year yield stable and credit spreads down slightly by 82 bps to 734 over the year.
Source : Bloomberg – Performances in USD at 29/12/2023
Disclaimer: Past performance is not indicative of future performance
Key events :
6 countries issuing Eurobonds had their ratings downgraded by rating agencies (Cameroon, Egypt, Ethiopia, Kenya, Nigeria, Tunisia), and only one had its rating upgraded (Congo). Despite an easing at the end of the year, financial conditions remained restrictive for African countries, limiting their access to international markets and prompting greater recourse to concessional lenders.
Ghana has started a debt restructuring process. The domestic debt part of the process has been completed, and discussions are underway with bilateral creditors on the external debt, which must precede any agreement with private creditors. The government proposed 40% haircut to Eurobond holders. Performance in 2023 Ghana 8,125% 2032: +21,4%.
Following the agreement between Zambia and its bilateral creditors on the restructuring of its external debt, an agreement reached between private creditors and the Zambian government (extension until 2038, 3-year grace period, coupon reduction) was rejected by official bilateral creditors, who found bondholders' concessions insufficient. Performance in 2023 Zambia 8,97% 2027 +38,1%.
After a severe liquidity crisis that saw its foreign reserves fall to less than a month of imports, Ethiopia obtained a debt servicing suspension in mid-November and is in talks with the IMF for a supporting program. The country defaulted on a coupon representing $ 33 M for the sake of equity between creditors and is having ongoing negotiations with bondholders for a reprofiling of its debt. The government's latest proposal is to extend the maturity from 2024 to 2028-2033 without reducing the nominal amount, and to lower the coupon from 6,625% to 5,5%. Performance in 2023 Ethiopia 6,625% 2024 +13,8%.
Kenya has been a major source of concern over the year due market’s doubts about its ability to repay or refinance a $ 2 billion Eurobond maturing in June 2024. The increased support from multilateral lenders has helped to contain default fears (IMF program extended from 38 to 48 months until April 2025 and increased to USD 4.45 bn from USD 2.3 bn concluded in 2021). Credit spreads are currently at 566 bps after a high above 1000 bps. Performance in 2023 Kenya 8% 2032 +17,1%.
Gabon experienced a coup d'état shortly after successfully completing a debt-for-nature swap with the issuance of a Blue Bond guaranteed by the US government entity DFC, combined with a tender offer on part of its outstanding Eurobonds. Despite a significant initial widening (940 bps), spreads ended the year stable at 623 bps, with the market being reassured by the lack of financial sanctions and the first decisions of the ruling junta. Performance in 2023 Gabon 6,625% 2031 +10,3%.
Nigeria saw the sharpest spread tightening of the African Eurobonds’ universe (-234 bps). Investors reacted positively to the implementation of bold reforms by the Tinubu’s administration (unification of exchange rate windows, removal of fuel subsidies, a new central bank governor and a promise to end the "ways & means“ policy). The decline in Nigerian risk premium has continued, even though the reforms lead to painful adjustments (higher inflation, loss of value of the NGN). Investors see these adjustments as a necessary step in correcting the country macro-economic imbalances. Performance in 2023 Nigeria 8,747% 2031 +27,6%.
Egypt, the largest index’s component (18.6%), had a highly volatile year, with spreads exceeding 1,500 bps over the course of the year. The country's fundamentals continued to deteriorate, with a significant risk of balance-of-payments crisis. The country is experiencing increased financing issues (excessive yields in both domestic and international financial markets, successive postponements of the USD 3 billion IMF program in the absence of reforms, and tightened conditionality on Gulf financing), which is fueling tensions over external liquidity. The year-end tightening was fueled by expectations of progress on reforms (exchange rate) and increased IMF support, but vulnerabilities remain high. Performance in 2023 Egypt 7,625% 2032 +6,7%.
Primary market and Outstanding amount:
By the end of 2023, African sovereign Eurobonds total amount is $ 146.2 Bn.
Redemptions amounted to USD 3.2 Bn over the year, divided between Egypt, Tunisia, Nigeria and Rwanda. Ghana and Ethiopia defaulted. The high level of US rates and spreads closed access to the primary market for most countries. Only 3 countries issued for a total of $ 5 Bn: Egypt $ 2 bn, Morocco $ 2.5 Bn and Gabon BB (debt-for-nature swap combined with partial buyback of its existing debt for $ 500 M) versus $ 6.5 Bn in 2022 and $ 19.7 Bn in 2021. The closure of international capital markets has been offset by greater recourse by governments to concessional lenders (IMF, WB). Ivory coast, for example, obtained a credit facility worth $ 3.5 Bn. Morocco, Kenya and Senegal have also obtained very large amounts from the IMF.
Source : Bloomberg – Performances in USD at 29/12/2023
Disclaimer: Past performance is not indicative of future performance
Carry and US Yield curve
The 2023 performance (+14.83%) was achieved with US 10-year yields stable and credit spreads slightly down from their start of the year’s level. This is the result of the asset class's high carry, which will continue to be a determining factor in 2024 performance.
The global decline in inflation has taken effect, with US real rates above 2%. The future movement of the yield curve, if market expectations are realized, would provide additional performance for the asset class.
Valuations
Credit spreads remain high compared with their historical averages, reflecting the continuing high refinancing risk for certain issuers. A fall in US interest rates would reduce the probability of default by issuers, and in turn credit spreads.
Redemptions and primary market in 2024
Expected repayments in 2024 are $9.5 bn (we have subtracted $2 bn from Ethiopia and Zambia, are on a restructuring process). The main countries involved are Egypt ($3.3 bn), Kenya ($2 bn), South Africa ($1.5 bn) and Tunisia ($1.2 bn).The fall in interest rates that began at the end of last year, if it continues, should reopen the market for issuers such as Morocco, South Africa, Ivory Coast and Senegal.
Main risks
A sharp recession in the US would lower interest rates, but it could also lead to aversion to risky assets, with spreads widening. A sharp fall in oil prices in the event of a recession would penalize oil-producing countries such as Angola and Congo, which are highly dependent on oil resources. Some countries, such as Egypt and Tunisia, are still facing major liquidity issues and restructuring risks. Kenya announced that the redemption of its $2 Bn Eurobond maturing in June 24 is covered, but the large amount involved is still a factor of risk.
Sources Bloomberg, Fred St Louis, Qantara AM
KEY CHARACTERISTICS OF THE ASSET CLASS
Sources Bloomberg/ Qantara AM at 29/12/2023