Lifted by yield-seeking foreign capital, African sovereign bond markets have boomed. However, as the market faces a possible cool-down, new research suggests that a downturn could be more sudden, and more intense, than previously thought, warns Frankie Evans.
Over the last three years, African sovereign borrowing has rocketed. As 2014 draws to a close, sub-Saharan Africa has issued nearly $7bn worth of sovereign bonds this year to international markets. This already tops the full-year figure for 2013, itself a boom year. Prior to 2013, this year's figure tops any other annual figure by a factor of two.
African governments are borrowing cheaply. Entering international debt markets for the first time in 2012, Zambia borrowed $750m in 10-year bonds at 5.6%, a rate lower than that available to Portugal, Greece, or even Spain at that time. Zambia's debt issue was reportedly oversubscribed by a factor of 15.
Non-sovereign borrowing has grown too. In 2013, bank lending to sub-Saharan Africa reached $138bn, beating the 2007 high of $118bn.
With this boom has come volatility. Following the global financial crisis, the US government bought large volumes of domestic bonds to keep interest rates low and prevent the economy from collapsing. This led to investments flowing into the higher-yielding emerging market bonds, including from Africa.
Then, in 2012, the US announced that it would begin tapering down its acquisition of US bonds. This suggested that the US economy was strong enough not to need state support and that yields on bonds would rise, drawing investments away from emerging markets and to the US.
By early 2013, the US's 'tapering talk' swept the froth from global emerging markets, but left most of sub-Saharan Africa less depressed than Morgan Stanley's 'fragile five'--Brazil, India, Indonesia, South Africa and Turkey.
However, in 2014, the continent's debt markets rebounded for a while. From April 2014 to July, cash flowed back into African sovereign and corporate bonds, pushing markets back up toward their pre-taper highs.
Now, however, African debt is looking fragile. In mid-October, the IMF cut its 2014 forecast for sub-Saharan African GDP growth from 5.5% to 5%, and bond yields are drifting upwards.
Complex global conditions
It is hard to say whether the African bond markets are now facing a real downturn, or are simply wavering as they rise.
There are reasons for confidence about the future. A growing glut of Eurozone...