AFRICAN EUROBONDS : MID-TERM REVIEW

Asset class key facts

African Eurobonds, represented by the EMBI Africa index, performed well at mid-year, up 6.3% (in USD terms), well ahead main bond asset classes, in an environment where financial conditions remained restrictive, with US 10-year yields 52 bps higher and the dollar stronger.

The risk premium defined here by the average index 'spread fell by 128 bps (606 bps at 06/28). More than half of this decline is explained by Egypt, whose average spread narrowed by more than 300 bps following the substantial injection of liquidity ($57 bn) in February by Gulf countries and international institutions.

Cameroon, Angola and Benin also experienced spread reductions, while Gabon, Côte d'Ivoire, Senegal, Kenya and Mozambique saw their spreads widening from the levels seen at the start of the year.

The first part of the year also saw the reopening of primary market for African countries, with a total of $5.6 billion issued by 4 issuers (Ivory Coast $2.5 billion, Benin $750 million, Kenya $1.5 billion and Senegal $750 million). Total primary issuance rises to $11.4 billion including supranational entities.

Two of the countries that represented the greatest risk of default, Kenya and Egypt, have solved their liquidity issues. Kenya, with the support of multilaterals, was able to repay its $2 billion Eurobond maturing in June, and Egypt thanks to the rescue mentioned above.

Two of the continent's largest economies, Nigeria and Egypt, have embarked on major financial reforms involving sharp currency devaluations combined with rate hikes. Egypt, with its currency now considered undervalued and the prospect of positive real interest rates, immediately attracted foreign financial flows.

The 1st half of the year also saw several elections which generated a lot of volatility but ended well in the end with Pastef’s victory in Senegal and an unprecedented ANC-DA coalition in South Africa, which was well received by the markets as paved the way for much-needed reforms in the country.

Zambia has completed the restructuring of its Eurobonds 4 years after defaulting, with the issue of 2 new securities giving an implicit recovery rate between 70% and 76%. Ghana has also reached an agreement with Eurobond holders, who will have the choice between a 37% hair-cut with rapid repayment, or a 30-year extension coupled with lower interest rate but no nominal hair-cut. The recovery rate at current levels would be around 51%.

Rating-wise, 4 issuers have seen their ratings upgraded: Benin (from B+ to B- by S&P), Cameroon (from CCC+ to B- by S&P), Ivory Coast(from Ba3 to Ba2 by Moody's) and Zambia (from Ca to Caa2 by Moody's). 5 sovereigns (Angola, Egypt, Morocco, Namibia and Nigeria) benefited from a favorable outlook, which could imply an upgrade of their rating in the coming months. On the other hand, one sovereign has seen its rating downgraded: Gabon from Caa1 to Caa2 by Moody's, and two sovereigns whose outlook is deemed negative could see their rating downgraded: Kenya (Moody's, S&P, Fitch) and Cameroon (Fitch).

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