On Wednesday May 1, Rwanda issued $400 million of 10 year Eurobonds with a 6.875 percent yield and a rating of B. The deal is US dollar denominated and was heavily oversubscribed. One has to remember that Rwanda cannot print dollars—it can only earn, borrow, or solicit them. Rwanda is not unique, other African nations are issuing debt at even lower yields.
Rwanda, a small agrarian African nation with a history of civil wars and dependence on foreign aid, has grown at about 8 percent per year. Rwanda’s foreign aid makes about 38 percent of government spending and accounts for 10 percent of GDP. About 49 percent of foreign currency flows into Rwanda come from “current transfers”, which are aid and remittances sent by Rwandans living abroad.
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Investors are taking an increasing amount of credit and political risk by purchasing bonds like Rwandan debt, in exchange for higher returns. Sub-Saharan African nations are selling $7 billion of bonds this year, more than in the past five years combined. Average yields on African nations debt fell 0.88 percent in the past 12 months to 4.35 percent, versus 1.75 percent for 10-year Treasuries, according to JPMorgan Chase & Co.
The table below shows 10 year rates of various nations as of May 7, 2013. Note that Rwanda’s 6.87 percent yield is lower than India’s 7.74 percent yield.
African Nations Yields Declined
For African Nations, including Nigeria, Gabon, Ghana, Ivory Coast, Namibia, the Congo, Senegal and the Seychelles, yields have declined this year. Nigeria, Africa’s most populous nation, has experienced a 2.74 percent drop in yields since the January 2011 sale of its $500 million issue due on 2021 to 4.05 percent on May 3.
Ghana has also benefited from a decline in yields on its $750 million of Eurobonds due on 2017. Yields have decreased 3.43 percent since the bonds’ October 2007 issue to 4.82 percent. The country has plans to sell more than $1 billion in bonds later this year, according to people familiar with the matter. Borrowing costs on Gabon’s $1 billion dollar bonds maturing December 2017 have fallen 4.78 percent to 3.13 percent since their December 2007 sale.
Giulia Pellegrini, a sub-Saharan Africa economist at JPMorgan Chase & Co. (NYSE:JPM) sees improving macroeconomic stability and economic diversification in some African countries. The International Monetary Fund (IMF) estimates that the region will post annual growth rates of 5.6 percent on 2013, faster than the 1.2 expansion in the developed world. This growth clip is the second fastest in the world behind emerging Asia. African countries are in need of more infrastructure to grow, and will need about $93 billion a year to overcome inadequate roads and electricity and water shortages.
Policymakers in the world’s poorest continent are seeking to decrease reliance on donor aid, diversify commodity dependent economies, and improve tax collection. Political and corruption risks still remain and some believe that investors are not getting adequate risk adjusted pricing. Charles Robertson, global chief economist at Renaissance Capital, said that African governments are benefiting from markets’ liquidity but that investors are not getting risk-adjusted returns in the dollar bond market space. Mark Rosenberg, a senior Africa analyst at Eurasia Group, noted that political risks may be underestimated under the current conditions that provide a lot of liquidity. Goldman Sachs cautions investors regarding African markets, noting that they are “very undeveloped.”