Citigroup’s Daniel Lebetkin has helped steer almost all of the $18 billion in international bond sales from Africa this year. From Nigeria to Kenya, he’s watched investors snap up debt at a blistering pace. One thing hasn’t changed: African nations pay more to borrow.
“It’s certainly unfortunate,” says Lebetkin. “There’s just a structural difference in yields.”
It’s a view shared widely among policymakers and investors, who point out that even as global interest rates fall and Africa’s markets mature, the region’s borrowing costs are still the highest in the world. Some argue it’s justified, given the track record of default in places like Ghana and Zambia, and the region’s turbulent politics and corruption scandals. Plus, African countries tend to be small and relatively new borrowers.
To others, however, like South African Finance Minister Enoch Godongwana, that’s not the full story. He sees a bias against the continent that spans from the rating agencies to the international organizations to the investors. And the proof is that “countries with the same fiscal metrics get a better rating than Africans.”
Africa Finance Corp., a development bank, has dubbed it a “prejudice premium,” estimating that the continent spends as much as $75 billion a year in additional borrowing costs. That extra charge is becoming more important as interest in emerging markets heats up again. This year is shaping up to be the busiest for African debt sales since at least 2021.
Pinning down what the bond premium is, and whether other factors are at play, is difficult because so much depends on things that are hard to quantify. A July study by the International Monetary Fund found that sub-Saharan African nations pay about half a percentage point more in the bond market than similarly rated countries, and that it tends to increase during times of stress. But they also said the premium vanishes once issues like governance and budget transparency are taken into account.
For a back of the envelope comparison, take two countries that sold 12-year bonds just last month: Kenya and Bahrain. Kenya is classified by the IMF as being at high risk of debt distress, while Bahrain has close ties to its oil-rich neighbors like Saudi Arabia. Kenya, rated one step below than Bahrain by S&P Global Ratings, paid 9.2% on its bonds. Bahrain sold at 6.625%.
Ghana is a case where it makes sense that investors demand a higher yield, given its default in 2022, said Andrew Matheny, the Africa economist for Goldman Sachs Group. Even so, the 2029 bonds trade just above 6%, which suggests investors believe in President John Mahama’s plan to restore confidence in the country’s finances.
“The fact that is happening, a mere three years after a sovereign default is in itself, in fact, somewhat surprising,” he said. “I don’t think there’s a lot of evidence that sub-Saharan Africa is being treated unfairly in the market.”
As a whole, borrowing costs in Africa have fallen sharply in recent years, helped by policy action like Nigeria’s decision to unify its exchange rate and interest-rate cuts in the U.S. and Europe. Recent eurobond sales for Nigeria and Kenya were five times subscribed, a sign of strong investor demand that allowed them to lower their borrowing costs. Nigeria paid 8.625% for 10-year debt this month, compared with 10.375% in December.
The average extra yield investors demand to hold dollar bonds of African nations instead of Treasuries now stands at about 3.7 percentage points, the lowest since 2018, based on data from JPMorgan indexes. It’s still higher than Latin America at 3.2 percentage points, emerging Europe at 2.2 percentage points, and emerging Asia at just 0.8 percentage points.
According to an analysis last year by Moody’s Ratings, the higher yields can’t be fully explained by the risk of nonpayment. Their data showed that among countries with similar ratings, African sovereign bonds tend to have the same default risk as other nations. Borrowing costs in Africa reflect “other considerations,” the researchers wrote, without elaborating on those reasons.
“We don’t have as much data in Africa,” Isaah Mhlanga, chief economist at FirstRand Ltd., Africa’s biggest lender by value, said in an interview in Johannesburg. “My speculation is that when investors don’t have that data, they add a little premium.”
But the lack of data is also correlated to a lack of resources allocated to data collection in Africa relative to other regions, he said, including by the ratings companies. He questioned whether other countries, including the U.S. and U.K., were penalized as much or as immediately for deterioration in “quality of institutions.”
African countries also tend to get downgraded faster at times of global turmoil, according to a white paper published in September by Gemcorp Capital, a major private lender. It cited “what is seen by some as an inherent rating bias against the region or even a perception deficit” that hits sub-Saharan Africa disproportionately when global economic conditions deteriorate.
The paper cited data showing that 62.5% of rated African countries were downgraded by the big three ratings companies during the Covid-19 pandemic, compared with a global average of about 32%.
Another hurdle is that African borrowers are a tiny part of the investment universe, accounting for less than 10% of all dollar-denominated bonds sold by emerging markets this year. If debt analysts are less familiar with a country, they may be less likely to make a buy recommendation, said Lauren van Biljon, a senior portfolio manager at Allspring Global Investments.
“It’s often down to the fact that these are issuers with only a few securities eligible for indices,” she said.
To Reza Baqir, who heads the sovereign advisory practice at Alvarez & Marsal, African countries need to join together to persuade the institutions and investors that lend dollars, and argue their case with data, instead of rhetoric. In his experience, African nations often pay a full percentage point more than similarly rated countries on five-year bonds, and face a tougher time unlocking cash from the private sector or official creditors.
“These are soft biases that are difficult to measure and quantify,” said Baqir, a former central-bank governor of Pakistan. “But there is a big role for African sovereigns themselves to play which can be effective.”
Over at Citigroup, Lebetkin says he’s constantly telling clients they need to do more to speak with investors and provide regular data. His team at the bank has a physical presence in 16 countries in Africa.
“We spend a lot of time on the ground on the continent,” he said. “It’s very important to go and see people where they are, in their offices, and not everyone does that. Also, given that we do all of these transactions, we think we have the best intel, which we think gives us credibility with issuers and investors alike.”
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