AFRICAN EUROBONDS :REVIEW 2024 & OUTLOOK 2025
- Agence MC WEB
- Jan 21
- 9 min read
2024 Performances
African Eurobonds recorded a very good year in 2024, outperforming all major bond
benchmarks. The benchmark JPM EMBI Africa index ended the year up +12.5% (in USD),
almost twice the performance of the global emerging index JPM EMBI GD, which was up
6.5% over the year. Qantara African Sovereign Bonds (ASB) fund celebrated its first
anniversary with a positive performance of +11.9% (USD share) over the year, a
performance achieved with a more diversified, more defensive portfolio, with a better
average rating than that of its benchmark (BB- in linear). Qantara ASB ranks among the top
4% funds of the category Emerging Fixed income (source: Bloomberg).
This good performance by the asset class was driven by:
An easing of global financial conditions in the first part of the year, particularly in the US, which enabled the primary market to reopen improving our issuers credit quality.
A resilient global macroeconomic environment.
Global disinflation which fueled the current cycle of interest rates cut.
Idiosyncratic events in the continent's 3 largest economies (bail-out in Egypt, major reforms in Nigeria that have improved the balance of payments, and the advent of a national unity government in South Africa that created a wind of optimism in the country) that led to a compression of risk premiums.
Eurobond restructuring processes finalized in Zambia and Ghana.
While the carry trade was the main driver of the asset class's performance, risk premiums
(credit spreads) compression also played a significant role (mainly those of Egypt, which
tightened by 372 bps, and Ghana, following the restructuring of its Eurobonds), offsetting
rising long term interest rates in US (+71 bps for the 10-year rate over the year) and a
stronger dollar.
Our investment universe (issuers in hard currencies) also proved more resilient to the
decline in emerging currencies against the dollar. (US Fed Trade Weighted Nominal
Emerging Index up + 9.3% over the year) in the latter part of the year.
Top Down Analysis
Disinflation, easing of global financial conditions and strengthening of credit profile
Global disinflation has enabled several countries to initiate rate-cutting cycles in the
developed world and in many African countries. The US curve, which is the benchmark for
our strategy, has steepened, with highly volatile 10-year yields ending the year 100 bps
above expectations at the start of the year and 71 bps above beginning-year’s levels.
Despite a reversal in the last 2 months of the year, with a rise in long term rates and a
stronger dollar, easing of financial conditions throughout the year enabled the primary
market to reopen and several issuers (Kenya, Senegal, Cameroon, Nigeria, Angola) to
refinance.
On average, African Eurobonds' issuers ended the year with a stronger credit profile than at
the start of the year. The overall rating of the investment universe has improved: 7
sovereign issuers and 1 supranational had their credit rating upgraded, while 4 sovereign
issuers and 1 supranational had their rating downgraded by rating agencies.
The asset class has been in positive territory throughout the year. with the rise in interest
rates, credit products now have a significant interest-rate component. The combined
effects of interest-rate components and bond spreads mitigate volatility.
The rise in interest rates in the first third of the year was offset by a sharp fall in issuer
spreads.
Fears of recession in the US then caused long rates to fall sharply, but spreads remained
relatively stable.
In the final quarter, uncertainty over the impact of Trump's future policies on global economy pushed up US rates, strengthened the dollar and drove down emerging currencies. The move was supported by a strong US growth and a resilient labor market, which led the Fed and the market to adjust its rate cut projections for next year. Asset class's spreads showed a great resilience over the period, if we exclude the “technical” decline linked to the restructuring of Ghana's Eurobonds.
Bottom-Up Analysis
Spreads ended the year at historically low levels (as seen before the Covid crisis), consistent with the macro context of 2024 and issuers fundamentals. The average level masks an high
dispersion: only Egypt, Benin and Rwanda have seen their risk premiums fall significantly. On the other hand, risk premiums for Senegal, Gabon and Mozambique suffered major widening.
Egypt
In February, a major injection of liquidity from a consortium of U.A.E. and multilateral lenders totaling $57 billion, or 15% of GDP, led to a sharp spread’s tightening. In return, the country sharply devalued its currency and committed to a floating currency system. A no-longer- overvalued currency , promises of economic reform and the prospect of positive real interest rates attracted portfolio inflows.
Nigeria
The country has embarked on major financial reforms, including a sharp currency devaluation combined with rate hikes by a more orthodox central bank and a reduction in oil subsidies. The country's currency is no longer overvalued, oil production is on the rise, trade balance and foreign exchange reserves have recovered significantly.
South-Africa
The advent of a government of national unity bringing together the ANC and the DA, has led to renewed optimism and a compression of spreads.
Kenya
The country was able to refinance its $2 billion Eurobond with the support of multilaterals and the issue of a new Eurobond. However, it had to revise its deficit reduction targets downwards due to the riots that followed the announcement of new taxes.
Senegal
Senegalese spreads were highly volatile throughout the year, ending wider. Although the
presidential and legislative elections, which saw the victory of Pastef, went well, the rise in
spreads was fueled by the revelation of a stock of debt (83% of GDP, i.e. 10 pts higher than
previously communicated) and a much higher-than-expected deficit (10% of GDP over 2019/23 instead of 5.5%).
Gabon
Gabon also saw its risk premium rise against a backdrop of uncertainty fueled by the ongoing political transition and severe refinancing constraints. The partial buyback of its 2025 Eurobond was not enough to ease investors' concerns.
Mozambique
Almost all elections on the continent (Ghana, Namibia, Senegal) went well, apart from the
Mozambican election, which led to violent protests. These protests, combined with delays in gas projects and country's financing difficulties, led to a sharp widening of spreads.
Restructurings completed in Zambia and Ghana
Both countries have completed the restructuring of their Eurobonds, with mixed fortunes:
Zambia has experienced weak growth and remains vulnerable with a high stock of debt. Positive surprises on Ghana's growth on the other hand, underpin the recovery of its debt ratios.
2025 Outlook
Macro backdrop
Global growth should remain solid, with a slight acceleration in Africa and resilience in the
USA (respectively 4.7% and 2.2% in 2025 according to the IMF). However, there are
uncertainties about the impact of D.Trump's policies on inflation, on the dollar and on the
rest of the world's economies. US long term rates are likely to remain volatile, favoring
active management.
Spreads
The phase of widening spreads that followed the inflationary shock of 2022 came to an end
with the restructuring of Ghana and Zambia (only Ethiopia is still undergoing
restructuring). The credit profile of our issuers has improved considerably thanks to the
support of multilateral lenders and the reopening of international markets. The historically
low level of spreads, even if justified by fundamentals, prompts caution. An excessively
strong dollar could lead to outflows in the asset class.
In addition to the “African risk premium”, significant disparities remain within the
investment universe, making bond picking decisive. Only Egypt, Rwanda and Benin have
seen their risk premiums tighten significantly.
Euro-denominated securities are still trading at significant discounts and should benefit
from the decoupling of the US and eurozone economies.
Carry
Carry remains high on the asset class (average yield over 9% in USD) and should be the
main driver of performance in 2025. The market environment should be driven less by
inflation fears than by economic growth, and thus see the return of the negative
correlation between sovereign spreads and US yields, helping to stabilize total returns.
Main risks
A trade war between the US and the rest of the world would lead to a stronger dollar
against emerging currencies, preventing emerging countries from cutting rates and
tightening financial conditions.
A hard landing for the US economy would lower rates but widen spreads.
Elections are due in Cameroon, Ivory Coast and Gabon.
Tunisia is still in a fragile situation, despite a clear willingness to honor its commitments.
Mozambique is experiencing financing difficulties and is highly dependent on the start of
gas projects. Senegal has started the year with an abysmal deficit and will have to agree on
a new program with the IMF.
Primary market
Primary market
After remaining almost closed for 2 years, the fall in spreads enabled the primary market to
reopen, with a total of $21.6 billion in new issues. Sovereign issues accounted for $13.8 bn,
offsetting the $10 bn redeemed in 2024.
We also had the inclusion of $12 billion of new Zambian and Ghanaian securities following
the completion of restructuring processes.
As of 12/31/24, our investment universe’s size was $183 billion, divided between 80% of
sovereigns and 20% of supranational issuers.
New issues outlook 2025
Over the coming year, repayments are expected to total around $13.4 billion, including $10
billion in sovereign issues.
Despite a strong willingness to meet its commitments, Tunisia presents a major risk.
Egypt has sufficient reserves to meet its maturities and should issue in the first part of the year.
Gabon has bought back almost half of its Eurobond maturing in June 2025. Despite significant difficulties, the country managed to refinance throughout 2024.
Angola and Nigeria should have no repayment difficulties, as both countries issued in 2024.
Namibia has set aside $407 million out of a total of $750 million to be repaid through a special sinking fund.
Countries such as Morocco, Ivory Coast and Egypt have announced their willingness to come to market in 2025, depending on market’s conditions. Kenya, Angola, Ivory Coast and Gabon could also issue new credit-enhanced bonds in exchange for commitments to protect nature.
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