African Eurobonds– In the face of US tariffs

Context

In early April, D.Trump signed an executive order implementing a new trade tariff policy that will impose additional  tariffs on imports from most of the world's trading partners. While the direct impact of the tariffs, finally suspended  for 90 days, would only partially affect African countries, their indirect effects would have more far-reaching  implications.  

News

Modest trade relations between Africa and the US 

D.Trump's goal is to tackle the US trade deficit and rebalance foreign trade. With Africa, US trade is indeed slightly in  deficit: in 2024, US goods exports to Africa totalled USD 32.1 Bn, while imports from Africa accounted for USD 39.5  Bn. This corresponds to a trade deficit of USD 7.4 Bn in 2024, or 0.1% of the US trade deficit (chart 1). By way of  comparison, the deficit is USD 235.6 Bn with the European Union and USD 295.4 Bn with China. 

Furthermore, if we look at the composition of African exports to the US (chart 2), they are mainly raw material inputs  for American companies. Nearly 50% are minerals and metals. A few countries export vehicles or textiles, but overall  it is mainly unprocessed raw materials. Among these, energy and energy products, as well as copper and certain  essential minerals, are exempt from trade tariffs.  

Overall, Africa is not the main threat to US balance of trade. 

Tariffs for African countries 

The American formula for determining tariffs has also been applied to Africa. US tariffs would average 15% on the  continent (compared with nearly 25% worldwide), with significant variations from country to country. 

Burkina Faso and the Seychelles, for example, are exempt, as is Russia. For the remaining countries, a basic tariff of  10% is applied, and twenty of them are subject to additional tariffs, known as “reciprocal tariffs”, ranging from 11% to  50% (chart 3). Among the countries facing the highest tariffs are Lesotho (50%), Madagascar (47%), Mauritius (40%),  Botswana (38%), Angola (32%) and South Africa (30%). 

D.Trump's tariffs could put an end to the African Growth and Opportunity Act (AGOA). Until now, this agreement  allowed over thirty sub-Saharan African countries to export most of their products to the US without taxes. The scheme  had been introduced in 2000 by B.Clinton, and was designed to support African economies. It is due to be renegotiated  by September 2025, but D. Trump might put an end to it.  

What's the impact?

Given the relatively low volume of trade with the US (6% of Africa exports), the direct impact of these taxes is likely  to be fairly limited on the region. Countries most dependent on US exports could see their revenues fall, but the  expected impact is limited to certain countries and specific sectors.  

Among the countries in our asset class, the share of exports to the US does not exceed 10% of total exports (chart 4).  Ethiopia ranks among the countries most exposed to tariffs, with 9.7% of its exports going to the US (mainly coffee).  Nevertheless, the country is only exposed to a 10% tax, which remains relatively limited. The US also accounts for  nearly 8% of Nigerian exports. However, over 90% of this is oil, a product exempt from tariffs. South Africa, on the  other hand, could see its trade balance decline: the US is the country's 2nd largest trading partner, accounting for  nearly 8% of total exports, notably in the automotive sector (15% of exports to the US). Tariffs could therefore have  a negative impact on the sector's export revenues. The direct impact of tariffs also concerns Kenya and its textile  industry: the US is one of the main destinations for Kenyan exports (nearly 6.5% of the total), which are mainly made  up of textile products (>60% of exports to the US). Export revenues in this sector could therefore fall, weighing on  business. 

More worrying, however, are the possible indirect effects of this new wave of protectionism.

Risk factors

The threat of global economic turmoil has led to a sharp fall in commodity prices, which is likely to weigh  on Africa's economic outlook. Africa's economic growth is correlated to commodity cycles, making the continent  highly sensitive to market fluctuations (chart 5). More than half of all African countries depend on oil, gas or minerals  for at least 60% of their export earnings. If growth slows sharply and sustainably over the coming months, Africa's  main exporters could face a major shock. Angola, Nigeria, Gabon and Cameroon could all be adversely affected by  falling oil prices. Zambia, South Africa, Namibia and Ghana, on the other hand, could be the first to be affected by  falling metal prices. 

Depending on the outcome of negotiations over the next three months, the environment could also be  characterized by sustained risk aversion on the part of investors, likely to weigh on the liquidity of certain  sovereigns. 

Risk aversion comes first with higher risk premiums, closing the financial market to African issuers. Bond yields on  African sovereigns have surged in recent weeks (chart 6), driven by a sell-off in risky assets. As a result, the premium  demanded for African sovereigns relative to US Treasuries has widened. Benchmark’s spreads(JP Morgan EMBI Africa)  have widened by 154 bp since the start of the year, and now exceed 600 bp. While the primary market remained  particularly active in Q1 2025 (USD 11.5 Bn issuances in total), the continuing rise in financing costs is likely prevent  African issuers from carrying out new issues, at least in the short term. While this deprives the continent of an  important source of financing, the absence of major Eurobond maturities (chart 7) limits the risk of default in the short term. Angola is the only country whose Eurobond repayment scheduled for November (around USD 860 Mn) could  fuel stress on the sovereign. Default is out of the question, given the level of foreign currency reserves, but the  country's external position could be significantly weakened. Added to this is the risk associated with the collapse of  commodity prices. 

Liquidity risk, on the other hand, could increase for certain African issuers. External financing flows represent  significant amounts, covering current external needs. The current environment is diverting certain flows  (particularly portfolio flows) towards safer assets. If this trend continues over time, and risk aversion persists, it  could increase pressure on governments to cover their needs (chart 8) which will have to increase the share of  domestic and concessional financing. 

Namibia's financing requirements are particularly high (24% of GDP), due to i) a large current account deficit on  hydrocarbon projects (covered by FDI) and ii) the repayment of the Eurobond next October (over 60% of which has  already been provisioned). The risk of liquidity tensions should therefore remain limited. 

Rwanda is also among issuers with particularly high external liquidity requirements, at nearly 14% of GDP.  Nevertheless, this financing depends relatively little on portfolio flows, the country benefiting more from grants and  concessional financing. The sustainability of the latter could be under threat, but for reasons unrelated to tariffs. 

Senegal, on the other hand, could indeed come under pressure: the country is structurally exposed to portfolio flows,  which are inherently volatile. The already complicated liquidity situation could worsen, especially as IMF financial  support is still pending. 

Despite these concerns, the current fundamentals of African countries imply a greater resilience than in 2020 or 2022:  real rates in most countries should preserve a certain attractiveness, exchange rate overvaluations have been  addressed after major devaluations last year (NGN, EGP, ETB) and external positions have been globally consolidated.  

Management comments & positioning

Following the announcement of reciprocal tariffs by the D.Trump administration, risk premiums on African sovereigns  widened sharply (chart 9), causing bonds to fall sharply. Supranational spreads held up rather well, and bond prices  benefited from the fall in US interest rates. 

Almost all issuers, with the exception of Morocco and Benin, have seen their risk premiums rise above the levels seen  at the end of 2023 (chart 10) and close to the peaks reached in 2022. 

While flows could remain negative and the primary market temporarily closed, the credit profile of issuers is stronger  than 2 years ago and the repayment schedule for 2025 is favourable. 

Despite current volatility, we believe that current valuations represent an attractive entry point for the asset class.

Positioning: The Qantara ASB fund has a yield of 11.8% in USD and a duration of 4.5.