Times Of Swaziland: GOVT NOT INTERESTED IN EXTERNAL BONDS

GOVT NOT INTERESTED IN EXTERNAL BONDS
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BY ASHMOND NZIMA on 30/08/2021 07:12:00


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.