(Bloomberg) — African governments are competing for the dollar, creating new boundaries for investors.
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As hard currency shortages deepen on the continent, governments are turning to bartering, currency devaluations, central bank exchange controls and aid from the International Monetary Fund and the Middle East to shore up their balance sheets.
Investors reward countries whose efforts to increase dollar liquidity are paying off. But it penalizes countries that cannot guarantee access to the currency needed to repatriate investments and profits, and discourages countries that do not have sufficient reserves to cover import costs and debt service. There is. African currencies have been the worst performers in the world this year, with about a dozen depreciating at least 15% against the dollar.
“Holding dollars is part of the value proposition,” said Benedict Craven, country risk manager at the Economist Intelligence Unit. “Can investors trade using foreign exchange from official sources? Can they send dividends abroad? These questions are dividing investment directions.”
The pressure on the dollar is most evident in local currencies.
“Tight foreign financing means African countries are unable to fully finance their current account deficits, leading to foreign currency shortages,” said Yvonne Mango, Africa economist at Bloomberg Economics. “There is,” he said. “The most vulnerable countries are those with overvalued currencies, such as Nigeria, Kenya and Angola, and those with low foreign exchange reserves, such as Malawi.”
Countries that have issued eurobonds that have been forced to devalue this year include Egypt, Nigeria and Angola. Kenya’s shilling and Zambia’s kwacha have also fallen to record lows against the dollar due to reduced capital inflows. The former is scheduled to repay a huge dollar debt next year, and the latter has defaulted on its euro bonds.
Kenyan dollar bonds have given investors a 2.1% loss since early July, when interest rates on U.S. Treasuries began to rise as the idea that interest rates would prolong took hold. This compares to an average loss of 1.7% for emerging market and frontier peers in the Bloomberg Sovereign Dollar Bond Index. Nairobi’s benchmark stock index fell 32% in 2023, the biggest decline of the 92 global markets tracked by Bloomberg, and the shilling fell 19%.
In Zambia, Mozambique and Nigeria, the inability to raise funds from abroad has forced governments to increase domestic issuance in shallow markets, raising borrowing costs. African sovereigns have been excluded from international debt capital markets since April 2022.
Nigeria’s longest-term naira bond is trading at a record yield of 18%. However, rising domestic yields have not attracted overseas buyers concerned about the depreciation of local currencies and the difficulty of repatriating returns. In Zambia, for example, foreign ownership of domestic bonds has fallen from 29% at the end of 2021 to around 22% today, due in part to restructuring processes and liquidity issues.
In some cases, the IMF can come to your rescue. The company announced last week that it would increase its lending to Kenya by $938 million to shore up its foreign exchange reserves ahead of the June maturity of its $2 billion Eurobond. That pushed the yield on the 2024 Treasury note down nearly 250 basis points in the four days ending Friday, but it remains well above 14%.
“The general consensus is that if a country is trading above 10% in USD yields, it cannot issue in the USD market,” said Lars Krabbe, portfolio manager at Koeli Frontier Markets AB. Ta. “This is, of course, bad for the general investment climate and debt sustainability of these countries, making them more dependent on concessional financing such as IMF loans.” Stated.
Meanwhile, countries with less pressing foreign exchange needs are becoming more attractive.
“Countries with large foreign exchange reserves and low dollar-denominated loan and bond repayment burdens are the most attractive,” said David Omojomoro, Africa economist at Capital Economics. “This is especially true for companies that are already making significant currency adjustments.”
Egypt is one of them. Citigroup strategists recently took a bullish stance on dollar-denominated debt in North African countries as sales of state-owned assets accelerate and governments appear on track to meet targets set by the IMF. Ta. Al-Borsa reported last month that the central bank was close to securing up to $5 billion in new deposits from Saudi Arabia and the United Arab Emirates.
Egypt’s eurobonds gave investors an 8.7% return in dollar terms in the second half of the year, while the country’s average developing country in the Bloomberg Sovereign Credit Index lost money.
Investors are likely to prioritize sovereign issuers with better access to alternative funding sources, such as Ivory Coast and Senegal, said Khan Nazri, portfolio manager at Neuberger Berman Asset Management.
“Ivory Coast, for example, was able to rely on blended finance deals last year at reasonable costs,” he said.
The West African country has also secured loans from the IMF, but its currency, the CFA franc, is pegged to the euro, making it less susceptible to fluctuations. In the region, Senegal is attracting investment in public-private partnerships in climate finance.
Senegal and Ivory Coast’s eurobonds have fallen less sharply than Kenya and are smaller than their average since July. Month-to-date, their performance has outperformed their peers.
Meanwhile, a dollar shortage is also hurting consumers and local businesses as import costs soar and inflation accelerates.
In Nigeria, the price of prescription drugs for conditions such as hypertension and diabetes has tripled in the past year. OK Zimbabwe, one of Zimbabwe’s biggest retailers, said sales volumes are currently below break-even as rising costs and a stronger exchange rate drive customers to the informal sector. And in Malawi, the price of corn, the staple food, has more than doubled in the past year.
“The problem is there’s only so much you can do without huge dollar reserves,” said Sonu Varghese, global macro strategist at Carson Group. “For investors, the risk that these countries remain on the brink of crisis persists.”
–With assistance from Naurine Ondiro, Anthony Osae-Brown, Matthew Hill, Ray Ndlovu, and Godfrey Marawanyika.
(Updated trends in Kenyan bonds in paragraph 11.)
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