East Africa: Easy Money? East Africa's Eurobond Dream

21 February 2013

A number of East African nations are hoping to generate extra finances by issuing Eurobonds. But while this could beneficial, it could also be risky.

A number of East African countries are planning to issue Eurobonds this year to raise funds for much-needed infrastructural projects and help fill their budgetary gaps.

Kenya is seeking to raise $1bn from these international bonds. Rwanda plans to issue $300m worth of bonds. And Tanzania's Minister for Finance and Economic Affairs, William Mgimwa, says his country has contracted a firm to assess its credit rating before it floats at least $700 million worth of Eurobonds.

What are the underlying rationale and implications of this new strategy?

Heroic endeavours and potential pitfalls

According to the East African Business Council, the region needs more than $3.4 billion in the next four years to modernise its shaky infrastructure.

Chronic underdevelopment in infrastructure in East Africa is seen as one of the key inhibitors to free regional trade. Despite nearly doubling intra-regional trade in the past five years, poor roads, costly and erratic energy supplies, and rising non-tariff barriers have proven to be a deterrent to new businesses.

Indeed, the 2013 World Economic Forum in Switzerland heard that it was easier and less costly for East African countries to do business with Europe than amongst themselves.

"Heroic endeavours are often required in remote parts of Africa to move products to markets or across borders", said Graham Mackay, CEO of SABMiller, the world's second largest brewer. He added, "On balance, the infrastructure deficit is widening rather than narrowing".

Having lost opportunities to competing regional economies in southern Africa and West Africa, East African countries are determined to turn around their investment landscape. "We have launched roads agencies, harmonised regional roads policies", Richard Sezibera, secretary-general of the East African Community (EAC), told Think Africa Press, "however, the development of the regional road network has been slugged by scarce resources".

As Shilan Shah and Neil Shearing explain, "bond issuances [unlike finance from multilateral institutions or aid flows] come with few conditions attached, allowing governments to channel funds into areas that it sees as matters of priority". The benefit of international bonds, they continue, is that they "give a country access to long-term finance at relatively cheap rates of interest".

And it seems there is an eager international market for African Eurobonds. For instance, Zambia, which issued its first ten-year international bond in September 2012, now provides a model for other nations. The $750-million instrument was oversubscribed by $11 billion.

There are, however, dangers involved with Eurobonds too.

"Most obviously", Shah and Shearing explain, "the burden of foreign-currency debt fluctuates with the exchange rate", although this can be mitigated by lower yields and longer-term maturities. There is also the risk of taking the measure to excess, and that the finance generated is not used effectively.

To avoid these dangers, countries will have to make their debt management departments as robust as possible. As Jeremy Mutai, a lecturer in economics at Moi University told Think Africa Press, "Kenya, Rwanda and Tanzania will have to strengthen their institutions. They will also have to create a more business-friendly climate, free of the perennial challenges of corruption. This is an uphill task."

Rwanda's mixed bag

As well as being prompted by desire for more finances, the planned sale of Eurobonds in some cases may also be a reaction to the budgetary void brought about by recent scaling down of grants and donor aid.

In particular, Rwanda has come under intense international scrutiny following allegations that Kigali supported the M23 rebel insurgency in the eastern DRC last year. Assistance was suspended by the likes of the UK, Netherlands and Germany (although the latter has since resumed its aid relationship with Rwanda).

Donor funding and aid reportedly accounted for 26% of Rwanda's proposed 2012-15 budget. And even as President Paul Kagame denied having played a role in the conflict, ratings agency Standard and Poor's downgraded the country's rating for 2012 from 'positive' to 'stable'.

According to Mutai, the international outcry "will have a significant bearing on the sale of the Eurobonds. Kigali may be compelled to postpone the deal or borrow at high interest rates."

However, the country can still rely on its reputation for being business-friendly. It is currently ranked as having the 52nd most business-friendly climate in the world by the World Bank's Doing Business rankings. Indeed, John Rwangombwa, Rwanda's Minister of Finance and Economic Planning, remains optimistic. "The appetite is high", he said, "The credit ratings are also quite impressive. The market is indeed excited and we should take the advantage."

Bad timing

Meanwhile, in Kenya and Tanzania, it is perhaps corruption and existing debts that are perhaps the greatest dangers.

Both countries' debt to GDP ratios are nearly 50% and this could dent their bid to approach the international debt market. Critics also say it would be illogical to float Eurobonds at the current time, when global market conditions are so volatile.

"The Eurozone crisis, France's shaky economy and the struggle between Britain and the EU are likely to spike exposure to risks", Njeri Kamau, a market analyst with Fusion Capital (a private equity firm operating in Kenya, Uganda, Rwanda and Tanzania), told Think Africa Press. "It will be prudent for Kenya, Rwanda and Tanzania to raise funds from the domestic market."

But the London-based Capital Economics predicts that, even with dubious governance structures, Kenya and Tanzania's deposits of natural resources - oil and gas respectively - will have a significant influence on the cost of raising debt on the market.

"The picture gets complicated slightly when a country has deposits of natural resources. This often means that bond investors are willing to accept lower yields", explained Shah and Shearing. "Nigeria has a ten-year international bond yielding under 5%, despite having worse governance scores than Zambia."

Ultimately, issuing Eurobonds remains a somewhat risky strategy for East African countries, with large potential benefits but also potential hazards. Yet it is also an opportunity East Africa might not be able to pass up to continue to compete with other regions.

Mark Kapchanga is a lecturer in economics in Nairobi. He has experience as a researcher at Kenya Association of Manufacturers in Nairobi and a publisher at Media One International. Follow him on twitter @kapchanga

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