By Economist Nea Tiililä, Finnfund,
For almost two years, the Sub-Saharan African economies have not received financing from international bond markets. Last week, there was a positive turn, as Ivory Coast successfully issued two Eurobonds. This raises hopes that the financing and debt crisis in Sub-Saharan Africa will begin to ease.
The Covid-19 pandemic, the political uncertainty caused by the war in Ukraine, the globally increased prices and especially the increased interest rates in the United States and the appreciation of the US dollar have caused a severe funding gap to African countries. Together with the rise in interest rates and the increased risks in the global economy, high yields have been available from lower risk investments. For example, the yield of the US treasury bonds has been around 5 percent at best, steering investments to more secure destinations.
Financing flows to Africa have dried up, which has caused significant challenges for many countries. There has been no financing available, and at the same time, government spending has increased due to the Covid-19 pandemic and the global price crisis. At the same time, debt service costs have increased significantly. In several African countries’ debt service and amortization already exceed 50% of government revenue.
While market financing has not been available, African countries have increasingly relied on the international financial institutions, the IMF and the World Bank, whose lending has grown significantly in the 2020s.
Ivory Coast’s Eurobond issuance is a positive signal that investments are starting to turn back to higher-risk countries, easing the funding shortage – at least for countries in a stronger economic position – that has lasted for several years.
Access to the financial markets and the moderation of yield expectations would be extremely important for many African countries, as a record number of Eurobonds issued in the 2010s will mature between 2024 and 2032. If refinancing is not available from the bond markets, many countries are at risk of debt distress, as happened to Zambia in 2020, Ghana in 2022 and Ethiopia in 2023. For example, Tunisia, Egypt and Kenya are currently facing high debt risks.
In January 2024, Ivory Coast issued two Eurobonds worth 2.6 billion US dollars. The yield of the sustainability bond stood at 7.875% and the yield of the conventional Eurobond at 8.5%. In addition to Ivory Coast, there are signs of decreasing borrowing costs also in other African countries. The spreads have started to fall, although large differences between countries remain. For example, the interest rate difference between Egypt’s government bond and the US treasury bond is still around 1000 basis points, whereas in Kenya and Nigeria, the spreads have decreased to around 600 basis points. This is very good news and will hopefully bring relief to record-high financing costs and reduce the escalation of debt risks in Africa.