African Nations Pay High Prices on The Global Loan Market

Due to the favorable rates being offered on the US financial market, African sovereigns will continue to confront high borrowing costs in the short term, making it more difficult to retire maturing Eurobonds for several nations over the next two years.

According to George Asante, managing director of Citi and head of markets for Africa, market access has been difficult for African nations and businesses, particularly for Eurobonds, primarily because of risk aversion in light of the challenging economic climate and pricing because of the higher rates offered in developed markets.

He pointed out that the risk premium is also used in domestic markets.

“The market access conditions have been quite difficult specifically for Eurobond, with sub-investment grade assets even more challenging. Africa is predominantly sub-investment grade,” said Mr Asante.

“When someone can get five or six percent in the US then it becomes more challenging to convince them of a similar yield on an African asset. Therefore, for Africa to achieve a lower cost of funding, you almost need to wait for the US to turn the curve.”

Even though inflation has decreased in the US, the Federal Reserve has gradually increased its benchmark rate to the current level of 5.25 to 5.5 percent. The most recent increase, 0.25 percentage points, was registered in July.

Concerns about the high rate demands made by potential lenders have made it difficult for issuers like Kenya to issue a sovereign bond in the previous year as a result of the sharp hikes—from 0.25 to 0.5 percent in March 2022.

Instead, the nation has relied on bilateral agreements and concessional lending from Bretton Woods institutions.

Kenya must refinance its $2 billion 2014 Eurobond by June of the following year.

The other African issuers include Zambia, which has a $1 billion Eurobond due the next year, and Angola, whose $1.5 billion bond was issued in 2015 but has already had a third of its value partially redeemed through a buy-back.

According to Mr. Asante, sovereigns must diversify their lending sources in order to avoid the high cost of financing.

Increasing the number of lenders participating will also help to balance supply and demand, tightening the premium paid from the perspective of the real yield.

The Kenyan government recently announced an extension of its external borrowing strategy in addition to refinancing existing debt in order to finance the majority of the budget deficit for the current fiscal year.

The National Treasury reduced the net domestic borrowing target from Sh586.5 billion to Sh316 billion, the Central Bank of Kenya revealed last month.

The external objective was increased to Sh402 billion from Sh131.5 billion by transferring the shortfall of Sh270.5 billion.

The monetary regulator stated that most of the increased foreign money will be on favorable terms, but part of it may also be accessed on commercial terms