GOVT NOT INTERESTED IN EXTERNAL BONDS

MBABANE - International financial markets are said to have opened a window for African governments to diversify their funding sources from traditional multilateral institutions and foreign aid.

For example, they can now borrow through issuing Eurobonds, which are sometimes referred as external bonds. These are defined as international bonds issued by a country in a foreign currency, usually in US Dollars and Euros. According an update shared on various online platforms, to date, at least 21 African countries have sold Eurobonds worth a combined total of over US$155 billion (about E2.2 trillion) on international bond markets since 2006. There is appetite for more. Money has reported.

Counterparts

Closer to home, Eswatini’s regional counterparts that include South Africa, Namibia and Mozambique are in the Eurobonds space. Eurobonds borrowing is done through commercial terms. The interest rates, term of bond and coupon payments are determined by market conditions. “Because of poor credit ratings and perceptions of high risk, African bonds are classified as high yields. They’re risky, but they offer high returns. Investors are still scrambling for Africa’s high yield bonds,” reads the report. Sought for his reaction on the reported appetite for Eurobonds among African governments, Minister of Finance Neal Rijkenberg conceded the country did explore the option but was deterred by two major risks. “They end up having a high interest rate, as our ‘risk’ is perceived to be high. The devaluation of our currency to the Euro also adds to the cost and makes repayment (bullet) very expensive. “Unlike most of our African counterparts, currently almost all of our external debt is at concessional interest rates (cheap; below two per cent),” said the minister.

Analysts

Analysts say Eurobonds are costly for governments. The high yields demanded by investors means high interest cost to governments. But they are attractive to governments because investors buy them without preconditions. Unlike multilateral concessionary loans that come with policy adjustment conditionalities, governments have total discretion in how to use the proceeds. They are, however, offered at high interest rates, high coupon payments and shorter debt maturities. This means government has a shorter period to use the costly funds and will also be paying periodic interest. The average tenor for Africa’s bonds is 10 years, with interest of five to 16 per cent.  In finance, tenor refers to the time-to-maturity of a loan or other financial contract. Meanwhile, over the past two years, 10 African countries are said to have issued bonds totalling US$19.8 billion (E291.6 billion). “It would have been more without the outbreak of the COVID-19 pandemic, which priced out issuers,” reads the report.

Ghana and Egypt, for instance, reportedly sold a combined US$7.1 billion (about E104 billion). The two countries returned to the market, issuing a total of about E100 billion in the first half of 2021. Their debt-to-GDP ratios have now risen to 78 and 90 per cent, respectively. Any debt-to-GDP ratio above 60 per cent in developing countries is considered imprudent according to the International Monetary Fund (IMF) and African Monetary Co-operation Programme’s threshold. Beyond the threshold, a country will be at high risk of debt default. Experts also urge African governments to consider discontinuing excessive Eurobond borrowing due to several reasons. African governments have been on a Eurobond issuing spree, piling on debt without evaluating the exchange rate risks and the real costs of repaying the debts. The IMF has identified 17 African countries with outstanding Eurobonds as near or under debt distress.

Resources

Debt servicing is consuming an average of more than 20 per cent of government revenue, leaving very few resources for other developmental needs. “All the Eurobonds issued over the past three years were spent of non-productive short-term recurring expenditure and repayment of maturing bonds. Issues by Benin, Côte d’Ivoire, Kenya, Morocco, Gabon, Ghana and Egypt raised funds to support budget deficit and bond refinancing,” shared the report. Also, foreign exchange reserves are generally depleting in most African governments while they accumulate debt that needs repayments in foreign currency.  Adequate foreign exchange reserves are important for governments to meet their international finance obligations. Eswatini’s gross official reserves were last recorded at E8 billion at the end of the past month, depicting a decline of 3.9 per cent from June 2021 and growth of 1.9 per cent over the year. The reserves represented an import cover of 3.4 months, lower than the 3.5 months recorded in June. Reserves should at least cover the equivalent of three months of imports.

Post your comment

Your name:

Your e-mail address:

Add your comments:

Please enter the code you see in the image:

Image:

Code: