African nations find themselves caught in a financial conundrum as they grapple with the challenges posed by high borrowing costs and the allure of attractive interest rates in the United States. According to George Asante, the managing director of Citi and head of markets for Africa, this situation has created a complex dilemma for African sovereigns and businesses, particularly in the context of Eurobonds.
Market Access Hindered by Risk Aversion and Economic Conditions
Market access has proven to be a formidable obstacle for African nations and businesses, especially when it comes to Eurobonds. The primary culprits behind this challenge are risk aversion, driven by a challenging economic climate, and pricing disparities caused by the higher interest rates offered in developed markets. As Asante points out, “The risk premium is also being applied in domestic markets.”
US Interest Rates Exacerbate the Problem
One of the key drivers of this dilemma is the attractive interest rates available in the United States, where investors can secure yields of five or six percent. This poses a significant challenge for African assets, as convincing investors to accept similar yields on African bonds becomes increasingly difficult. “For Africa to achieve a lower cost of funding, you almost need to wait for the US to turn the curve,” adds Asante.
Federal Reserve’s Rate Hikes Complicate Matters
Despite decreasing inflation in the US, the Federal Reserve has gradually increased its benchmark interest rate, currently hovering between 5.25 to 5.5 percent. The most recent hike, a 0.25 percentage point increase, occurred in July. These rate hikes have raised concerns among potential lenders, making it challenging for issuers like Kenya to launch sovereign bonds. Kenya, for instance, has turned to bilateral agreements and concessional loans from organizations like the Bretton Woods institutions to meet its financing needs while it navigates these high rates. Kenya faces the task of refinancing its $2 billion 2014 Eurobond by June of the following year.
Diversification of Funding Sources
African sovereigns, including Zambia and Angola, are now compelled to diversify their lending sources to circumvent the high cost of financing. Zambia faces a $1 billion Eurobond due the next year, while Angola’s $1.5 billion bond, issued in 2015, has already seen a third of its value partially redeemed through a buy-back.
Shifting Focus to External Borrowing
In response to these challenges, the National Treasury of Kenya has adjusted its borrowing strategy. The net domestic borrowing goal was reduced from Ksh586.5 billion ($4 billion) to Ksh316 billion ($2.2 billion). Simultaneously, the external borrowing objective has been increased from Ksh131.5 billion ($900.7 million) to Ksh402 billion ($2.8 billion). The Central Bank of Kenya has noted that a significant portion of this increased foreign borrowing will be on favorable terms, although some may also be accessible on commercial terms.
As African nations continue to navigate this intricate financial landscape, the balancing act between attracting investments and managing borrowing costs remains a critical challenge.
