African Issuers Scrutinized After Mozambique’s Bond Default

LAGOS (Capital Markets in Africa) – After Mozambique’s default, investors are wondering who’s next in Africa.

Bloomberg’s sovereign credit risk model — which uses data including budget deficits, foreign reserves, non-performing bank loans and political instability to calculate default probabilities — flags four candidates among African Eurobond issuers: Senegal, Tunisia, Ghana, and Zambia. Mozambique became the first African country to default on dollar bonds since Ivory Coast in 2011 when it failed to settle an almost $60 million coupon initially due in January. It had a 15 day grace period that ended on Thursday.

“It’s prompted fears of a string of debt crises across Africa,” John Ashbourne, Africa economist at Capital Economics Ltd. in London, said in an e-mailed response to questions on Feb. 1. “While the risk of contagion in a region with disparate economies and few linkages is low, some countries may face difficulties repaying or rolling over bonds sold during the boom years.”

Those boom years were spurred by rising commodity prices and a global hunt-for-yield as interest rates in rich countries plummeted, encouraging African governments to sell Eurobonds in record volumes. But the slump in raw material and oil prices strained their finances and sent currencies tumbling, making their foreign debts more expensive to pay off.

Senegal
With a 5.6 percent probability, Senegal is the African bond issuer most likely to default in the next 12 months, according to Bloomberg’s model. Almost one-fifth of banks’ loans are classified as non-performing and at 56 percent, the government’s ratio of debt to gross domestic product is now higher than when it was given relief under the Heavily Indebted Poor Countries Initiative, or HIPC, a decade ago.

Tunisia
Tunisia has a 3.5 percent chance of missing payments, the third-highest in Africa. The north African nation, which has suffered from terrorist attacks against tourists and been hit by industrial strikes, has a political risk score of 64, according to the Economist Intelligence Unit. That’s more than double South Africa’s 31 and higher than Turkey’s 55.

Ghana
A darling among investors once it started oil production in 2010, Ghana turned to the International Monetary Fund for a bailout of almost $1 billion in 2015 after public spending and fiscal deficits ballooned. Its probability of defaulting has risen more than tenfold since 2011 to 3.4 percent. More trouble could be in store. Ghana’s bonds tumbled on Feb. 1 after the three-week-old government said it found a $1.6 billion hole in the budget.

Zambia
Zambia is classified as medium-risk, with a 1.04 percent chance of missing debt payments in the next year, according to the model. It has borrowed $3 billion on the international capital markets starting with its first Eurobond in 2012. But it’s running out of cash: foreign-exchange reserves shrank 25 percent in 2016 to $1.9 billion. Investors are hoping it soon reaches a funding deal with the IMF.

The following countries are considered low risks under Bloomberg’s model. But Ashbourne of Capital Economics says investors should be wary of them given their governments’ opacity and economic policies.

• Angola: Sub-Saharan Africa’s third-biggest economy after Nigeria and South Africa, the oil-dependent country may have more debts than it’s disclosed, according to Ashbourne. “It has a struggling economy, an over-valued currency, and large public and private debt loads,” he said. “And given Angola’s opaque — and at times overtly secretive — government, it’s also the country most likely to spring a Mozambique-style surprise by announcing that things are much worse than the official figures suggest.”
• Kenya: East Africa’s biggest economy has benefited from falling oil prices and growth has been above 5 percent every year since 2012. But spending is also high: the budget deficit rose to almost 8 percent last year, according to Standard Bank Group Ltd. And in October opposition leader and ex-Prime Minister Raila Odinga warned investors against buying Kenya’s next Eurobond, saying that almost $1 billion from a debut deal of $2.75 billion in 2014 had gone missing.
• Ivory Coast: It may be sub-Saharan Africa’s fastest-growing economy and have the region’s lowest Eurobond yields after South Africa and Namibia, but political risk is mounting. A two-day mutiny by soldiers last month paralyzed several cities and showed that the world’s biggest cocoa exporter is still fragile after defaulting in 2011 during a conflict sparked by an electoral dispute.