INVESTORS looking for more than the paltry yields on US Treasuries might consider Côte d’Ivoire’s eurobond (as a dollar bond issued outside America is known). It was issued in 2010 as recompense for bonds that Côte d’Ivoire had defaulted on a decade earlier. Those debts in turn were Brady bonds, an invention of Nicholas Brady, a former American Treasury secretary, which was designed to relieve the debt burden of poor countries.
Côte d’Ivoire’s eurobond is thus a residue of debt that has soured twice. The bond does not mature until 2032. The issuing country was not long ago embroiled in civil war. Yet so urgent is the desire for alternatives to rich-world government bonds that the yield has halved to 7% since the beginning of 2012. The hunt for bonds that pay more interest to retirees has taken mainstream pension funds beyond the rich world, past markets that are merely emerging, to “frontier markets” where the rewards—and the risks—are greater.
Aside from Côte d’Ivoire, there are eight issuers of eurobonds in sub-Saharan Africa that count as frontier markets (including Angola, which is the guarantor of a loan note that is counted as a eurobond by many). Zambia is the newest. Its debut issue in September was heavily oversubscribed. The initial plan was to raise $500m but the auction drew almost $12 billion of orders. In the end $750m of ten-year bonds were sold at a yield of 5.4%. Almost all were snapped up by fund managers in America and Europe.
Continent of dreams
The desire to tap the flood of money from rich countries is understandable. A scarcity of local savings and a history of high inflation keep domestic interest rates high in many African countries. The difference in borrowing costs is large for places like Nigeria and Zambia and vast for a country like Ghana (see chart). Many issuers have oil and gas reserves and thus sources of dollars to pay off bonds.
Most funds that buy African eurobonds would be wary of buying bonds issued in local currencies, despite the higher interest rates. The markets such bonds trade in are typically thin, which increases the risk of a crash in the exchange rate if foreign investors suddenly pull out. Eurobonds are typically issued in chunks of at least $500m, so they are fairly liquid. Payment is in dollars. They seem a safe way to bet on fast-growing African economies. It helps that public-debt burdens in Africa are modest by rich-world standards.
Seasoned investors in Africa know the risks. Novices do not. “There will be an election, perhaps two, in the life of all these bonds,” says Stuart Culverhouse of Exotix, a brokerage that specialises in frontier markets. The bet investors are making is on countries’ willingness to service debts even after a change of government. Côte d’Ivoire missed three payments after one side rejected the results of its 2010 election. The new government has since said it will pay them this year.
Fiscal discipline is a work-in-progress in Africa. Ghana is one of the darlings of frontier investors because of its stability. But it revealed earlier this month that its budget deficit had ballooned to 12.1% of GDP last year. Those low-yielding Treasuries may not be such bad value after all.