Wby Iliam Ruto His first 18 months as Kenya’s president have been haunted by a single date: June 24 this year, when a $2 billion government bond is due to be repaid. His cash-strapped government has raised taxes and cut subsidies as protests have taken to the streets. Now he has bought some respite, at a rather exorbitant price. On February 12, Kenya issued a new $1.5 billion bond due 2031, yielding 10.4%. It will use the proceeds to buy back most of the debt due in June, closing the box seven years later.
Governments in sub-Saharan Africa are temporarily returning to international capital markets after a 21-month hiatus. Last year was the first since 2008 when no country in the region sold a dollar bond as high interest rates shut them out of the market. The freeze was broken in January when Ivory Coast borrowed $2.6 billion at 8.5% and below. Benin then raised $750 million at a similar rate. These bond sales gave hope to other African governments. Kenya’s high bond yield warrants attention.
Africa’s fortunes follow the mood of the Federal Reserve. When America’s central bank pours cheap money into the markets, as it did after the 2008 financial crisis, some trickle down to Africa in search of higher yields. When the Fed raised interest rates over the past two years, funds came back the other way. In addition, the twin shocks of covid-19 and the Ukraine war made investors seek safety. China’s lending to Africa has also fallen to its lowest level in two decades. The combined impact is clear in Africa’s long-term external debt flows: by 2022 governments were repaying roughly as much as they were taking in new loans (see chart).
Investors are now returning to Africa as they expect the Fed to start cutting interest rates later this year. The spread in yields between U.S. and African government-issued bonds – an indication of the risk premium investors demand – has shrunk by four percentage points from its recent high. But the door opened only a crack. Of 17 countries in sub-Saharan Africa that hold foreign-currency bonds, about 12 are still locked out of the market by double-digit yields, estimates Stuart Culverhouse of Tellimer, a research firm specializing in emerging markets.
For some countries it is already too late. A wall of bond repayments is falling due this year and next. Zambia, Ghana and Ethiopia have defaulted on all their obligations and entered into protracted talks with their creditors. Kenya, which has flirted with the same fate, is willing to pay handsomely to borrow because it does not want to burn through its foreign reserves. The high yield suggests investors still see it as a risky bet, says Churchill Ogutu, a Nairobi-based analyst at IC Group, investment bank.
Until African governments find a way to generate more revenue and exports, they will always be vulnerable to the whims of foreign investors. “Going back to the capital markets is just recycling the problem,” argues Jason Braganza of the African Debt and Development Forum and Network. NGO based in Zimbabwe. The interest rate African countries typically pay to borrow from private lenders is three times what they pay other governments or multilateral banks. Many today spend more on interest payments than on education or health.
Gregory Smith, the author of a book on African debt, compares the course of bond yields to a hiking trail. In the years following the financial crisis, African governments were in a green valley of low interest rates. Since the pandemic, they are gasping for air at the top of Mount Kilimanjaro. They are now on a lower plateau where they can breathe a little easier. But it’s still a long journey down. ■