October 24, 2012
Reposted from the Wall Street Journal
By Patrick McGroarty and Prabha Natarajan
African countries are winning over investors scrounging for profits in a world of falling interest rates and lackluster growth.
Last month, Zambia raised $750 million with a 10-year global bond in an auction that drew offers worth more than 15 times that amount. Nigeria in September sold 30 million naira ($192,000) in five-year bonds, to demand twice as high. Spurred by the heavy interest, Rwanda wants to issue a global bond by June and Kenya is planning one as early as next year.
Investors’ willingness to step up to buy African bonds is another sign of their thirst for yield. Efforts by the Federal Reserve and other major central banks to push down interest rates and buy developed-market bonds have driven investors further and further afield.
Africa, a continent of more than 50 countries, is considered one of the last investing frontiers—many of its nations have been isolated from international markets, in part due to a history of default by some countries.
But the continent, bolstered by increased political stability, is coming out of its shell. Capital flows into funds focused on Africa have increased 15% to $2.53 billion in the year through Aug. 31 over the previous 12 months, according to EPFR Global.
The yields on global bonds issued by Ivory Coast, Senegal, Nigeria and Namibia dropped an average of about 2.5 percentage points this year through October, according to Capital Economics.
Yields on some African bonds are only slightly higher than the yield on the debt of some troubled European economies. Spain, which Standard & Poor’s rates triple-B-minus, sold €4.6 billion in bonds at a yield of 5.3% last week. A global bond issued by Zambia, rated four notches lower, last month priced to yield 5.6%. Now the bond is trading at a yield of 5.3%, offering investors an immediate return. Falling yields mean higher prices.
At least three more countries are expected to issue global bonds next year, connecting most of Africa’s most dynamic economies to international markets.
“Investors have been forced to move to this new frontier due to this search for yield,” said Marcelo Assalin, head of emerging-market sovereign debt at ING Investment Management, which has $377 billion in assets. Mr. Assalin has been buying Nigerian treasury bonds since the start of this year.
The search for yield is coupled with growing faith in Africa’s stability, as the continent holds more democratic elections and governments become more transparent and keen for foreign capital, economists say.
This year, 23 African countries are expected to hold multiparty elections; In 1989, only three African countries were considered democracies, according to the Africa Research Institute, a London think tank.
That is setting the stage for currencies in countries such as Ghana and Egypt to stabilize and even rise, economists say.
“All these currencies now have huge opportunities to gain, as they stabilize,” said Steven Bailey-Smith, head of African research at Standard Bank Group.
Many African countries are fundraising to build modern highways, ports and power grids. Using traditional sources of funding—aid or loans from rich nations and multinational lenders—invites more bureaucratic and political uncertainty than floating overseas bonds.
Still, many African countries are far from ready for their date with international investors.
Armed conflicts simmer across the continent, from an oil dispute between Sudan and South Sudan to rebellion in the Democratic Republic of the Congo. Those rebels were supported by the government of neighboring Rwanda, often seen as one of Africa’s most welcoming countries to investors.
Ivory Coast issued global bonds worth $2.3 billion in 2010, months before the outbreak of a power struggle that brought the economy to its knees. The country defaulted on the debt, missing three payments, although President Alessane Ouattara has since promised to repay bondholders. Investors remain worried about the fate of other African countries such as Nigeria, which faces sectarian violence.
“We appreciate that yields are higher, but obviously those yields represent the risks that are clearly there in investing in Nigeria,” said Michael Lee, a manager at Wells Fargo’s WFC -1.83% Advantage Local Currency Fund. Mr. Lee is considering buying bonds from Nigeria and other African countries, but hasn’t done so.
Still, investors are buying into countries with stronger growth and less immediate turmoil.
Dave Robbins, portfolio manager of TCW’s emerging-market funds, is looking to buy local government bonds in Ghana and Kenya, a year after first purchasing Nigerian bonds. “High yields and potential currency appreciation are attractive, but these trades are less liquid and have a lot higher volatility, so they don’t always work out,” he said.
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