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Attracted by the prevailing low interest rates, cash-strapped African countries looking to borrow money on international private markets are increasingly turning to Eurobonds as the instrument of choice.
In 2006, Seychelles became the first country in sub-Saharan Africa, other than South Africa, to issue bonds. A year later Ghana followed, raising $750 million in Eurobonds.

Since then they have been joined by Gabon, Senegal, Côte d’Ivoire, the Democratic Republic of Congo, Nigeria, Namibia and Zambia.

In September 2012, Zambia made a splash on the international private market, launching a 10-year bond at $750 million.

The issue was oversubscribed by $11 million and became a model for other African nations. Rwanda followed suit in 2013 with a $400 million Eurobond issued on the Irish Stock Exchange.

Zambia is considering issuing a $1 billion Eurobond this year to finance its budget deficit. It also plans to spend over $600 million on developing power, road and rail infrastructure.

Kenya is finalising plans for its debut entry into the Eurobond market, seeking up to $1,5 billion to finance infrastructure projects.

For certain governments in sub-Saharan Africa, Eurobonds are a means of diversifying sources of investment finance and moving away from traditional foreign aid.

Not only do these bonds allow such governments to raise money for development projects when domestic resources are wanting, they also help reduce budgetary deficits in an environment in which donors are not willing to increase their overseas development assistance.

Corporate entities in sub-Saharan Africa, like Guaranty Trust Bank in Nigeria and Vodafone Ghana, have also successfully issued Eurobonds. Global investors have been eager to purchase these bonds for higher yields amidst low returns in mature markets. It is a sign of the investors’ endorsement of the region’s buoyant economic prospects, observes Mthuli Ncube, chief economist and vice-president of the African Development Bank (AfDB).

The developed world has been rocked by a series of economic and financial crises while Africa has displayed steady growth over recent years, averaging about 5 percent per annum. Analysts believe the incentive for investors is solely the prospect of higher gains.

Eurobonds have also given African countries an opportunity to integrate into global financial markets. Up until recently, according to the AfDB, access was limited for African countries apart from Morocco, South Africa and Tunisia, which entered the markets in the 1990s.

But there are serious challenges to Africa’s future in international markets, analysts warn. Buyers of African bonds raise concerns about the countries’ vulnerability to commodity prices, political instability, fiscal irresponsibility, lack of reliable statistics and transparency, and poor histories of debt management.

Therefore, sovereign bonds issued by resource-rich African countries are deemed risky assets by some investors.

Recent speculation that the US Federal Reserve bond-buying programme would end in 2014, along with rising US treasury yields, sparked a sell-off in emerging markets, Angus Downie, the head of economic research at Ecobank, a pan-African bank, told Business Daily of Kenya.

“Investors will want higher yields,” he says. Since the beginning of 2014, the Federal Reserve has started cutting back on its bond-buying programme, leading to speculation that this might spark an increase in interest rates. Higher interest rates raise the cost of servicing the national debt.

On the flip side, these bonds have not been the saving grace that African countries thought they would be. — By Jocelyne Sambira, courtesy of www.un.org/africarenewal.