African bond markets: Uncertainty remains high, but progress is being made

By Mark Dunley-Owen, portfolio manager, Allan Gray Africa Bond Fund

A lot happened in African markets during the second quarter of 2023. Much of this was positive for African credit, although it will need to be backed up by future actions to prove enduring.

Bola Tinubu was elected president of Nigeria. He surprised many by following through on his campaign promise of making Nigeria a more attractive foreign direct investment destination, notably cutting fuel subsidies and moving towards a market-determined exchange rate. The official naira to US dollar exchange rate weakened by 65% over the quarter while Nigerian Eurobonds rallied on the expectation of more sustainable government finances and improved dollar liquidity.

Having defaulted on its debt in 2020, Zambia became the second developing country after Chad to reach a debt relief agreement with its official creditors under the G20 Common Framework. Importantly, its largest creditor, China, agreed to the relief package despite initial concerns around its participation. Indications are that the agreement will extend the repayment of $6.3 billion of Zambia’s debt over 20 years at interest rates not exceeding 2.5%. A similar package is expected to be presented to Zambia’s private creditors.

Zambia’s creditors’ agreement bodes well for Ghana which is following a similar path. Ghana’s official creditors committed to providing debt relief to Ghana in May which allowed the International Monetary Fund (IMF) to begin payments to Ghana under its Extended Credit Facility. The Ghanaian government has since sent a debt restructuring proposal to the creditors’ committee, starting formal negotiations. An outcome similar to what has been proposed for Zambia plus the already-announced restructuring of local currency debt would lower Ghana’s interest payments – a key factor impacting the country’s debt sustainability.

Egypt faces similar challenges with more than half of government revenue expected to be used to pay debt interest payments over the coming year.

Unlike Zambia and Ghana, Egypt continues to meet its foreign interest payment obligations and has expressed a desire to avoid default. To do so, the authorities are taking steps to attract foreign capital. They devalued the Egyptian pound for the second time in January, proposed incentives and new tax treatment for foreign direct investment, and are progressing with the privatisation of state-owned assets. For now, these measures appear insufficient, with the exchange rate remaining below the market clearing level and little foreign capital entering the country. Egyptian bonds therefore remain priced for default. While this is a possibility, Egypt’s important regional and global role, strong relationship with Gulf states and willingness to engage with the IMF suggest that a default is less likely than in other stressed African borrowers.

Events in other African countries were less impactful but still important. South Africa’s power crisis continued, while the country’s relationship with the US was strained by allegations that it was selling arms to Russia. Senegalese authorities targeted the opposition leader, Ousmane Sonko, and convicted him of seemingly weak charges. This led to protests that left 16 people dead and more than 350 wounded. The Ruto administration in Kenya delivered its first budget, outlining a plan for fiscal consolidation and proposals for improving tax collection as Kenya works towards being able to repay its $2 billion Eurobond maturing in June 2024.

The takeaway from these events is that uncertainty remains high, but progress is being made. We believe this progress is not priced into African bonds, providing upside if reality turns out better than feared. Zambian Eurobonds, for example, rallied about 25% over the quarter on the restructuring news. We believe that at present, select bonds in many African countries have similar potential.