What are Eurobonds?
A eurobond is a type of bond that is issued in a currency that is different from the country or market in which it is issued. Despite its name, it has no particular connection to Europe or the euro currency. Due to this external currency characteristic, these types of bonds are also known as “external bonds”. Eurobonds can be issued by sovereigns, international syndicates, and even private organizations in need of foreign-denominated money for a specified length of time. These debt instruments are usually offered at fixed interest rates, even if they are issued for long periods of time.
Introduction of Eurobonds in Africa
For years, African countries relied heavily on their exports and foreign aid to fund vital infrastructures such as roads, power, and clean water. This changed in 2006, when the Seychelles became the first sub-Saharan Africa (SSA) country, ex-South Africa, to make its way into the international financial markets with the issue of its $200 million Eurobond.
Since then, several other SSA countries (Ghana, Gabon, Senegal, Nigeria, Namibia, Côte d’Ivoire, Zambia, Rwanda, Kenya, Ethiopia, Angola and Cameroon) have issued Eurobonds, with values generally ranging from $500 million to $1 billion. As of July 2021, this financial instrument has become a $136 billion asset class, with 21 SSA countries now holding one or more outstanding Eurobonds. The pandemic has not slowed demand either, with $11.8 billion worth of Eurobonds issued by African sovereigns in 2021 alone.
Some African countries have tapped the international markets more frequently than others (i.e. Ghana, which has raised capital four separate times). Meanwhile Gabon, Senegal and Zambia that have each gone to the market three times, Nigeria, Côte d’Ivoire have issued bonds twice and finally Kenya, Cameroon, Angola, Ethiopia, Seychelles, Namibia, Rwanda have issued Eurobonds just once.
An Important Source of Finance for Africa
Eurobonds have become an important source of development finance for African countries, particularly in terms of infrastructure funding, and more of these will be issued in the near future. Nigeria, for example, recently priced a $1.25 billion Eurobond issue at 8.375% this month, a premium compared to existing tenors as the country seeks to raise cash to fund a costly petrol subsidy scheme in the face of limited oil revenue.
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.
While the high yields demanded by investors means high interest cost to governments, they are attractive to governments because investors buy them without preconditions. Unlike multilateral concessionary loans that come with policy adjustment conditionalities, governments have total discretion in how to use the proceeds.
With this in mind, SSA nations that intend to issue Eurobonds should ensure that the proceeds from the bonds are used to finance productive investments and not channeled to finance fiscal budget deficits. The relatively high interest rates are a reminder that funds raised in international financial markets are costly and ought to be used for intended purposes that yield high returns, thus leaving budget deficits out of scope.
Investor Interest in Africa’s Eurobonds
Higher interest rates, particularly in a low interest rate environment, have been the driving force behind investor interest, specifically from the US and Europe, to take up these African eurobonds. On top of that, coming out of a pandemic-induced lull in borrowing, governments and investors are feeling more confident about Africa’s prospects, in part, thanks to the billions of dollars’ worth of Covid-19 recovery help from the IMF and other multilateral lenders.
Some have criticized the rates that African countries pay for these bonds—5 to 16% on 10-year government bonds, compared to near zero to negative rates in Europe and the US in 2019. Others attribute the high rates partly to poor credit ratings, but also to a mismatch between the instrument’s duration and what it is being used to fund, which may be long-term infrastructure projects.
Eurobonds are particularly attractive to investors looking for higher yields than those offered by developed countries, however investors should still consider different yields based on different countries’ risk perceptions. All things considered, this emerging marketplace has certainly opened a spigot of funding that could be promising for African countries.