SOVEREIGN & SUPRANATIONALOCTOBER 8, 2013

SPECIAL COMMENT

International Sovereign Issuance in Africa
2013-14: A Rating Agency Perspective
This report reviews recent and prospective international issuance in Africa, and offers an analysis of
the outlook for African sovereign issuers and their local capital markets.

Summary Opinion

Table of Contents:
SUMMARY OPINION
1
INTERNATIONAL BOND ISSUANCE IN
AFRICA IS STILL AT AN EARLY STAGE
2
AFRICAN GOVERNMENTS WILLCONTINUE TO RELY ON OTHER
EXTERNAL SOURCES OF FUNDING
14
THE ABSENCE OF FULLY DEVELOPEDDOMESTIC CAPITAL MARKETS SUPPORTS
THE USE OF INTERNATIONALISSUANCES
19
APPENDIX24
MOODY’S RELATED RESEARCH
28

Analyst Contacts:
DUBAI+971.4.237.9536

Aurelien Mali
+971.4.237.9537
Vice President - Senior Analyst
aurelien.mali@moodys.com
NEW YORK+1.212.553.1653

Elisa Parisi-Capone+1.212.553.4133
Assistant Vice President - Analyst
elisa.parisi-capone@moodys.com
Kristin Lindow+1.212.553.3896
Senior Vice President
kristin.lindow@moodys.com
Lucio Vinhas da Souza+1.212.553.1117
Managing Director -Sovereign Chief Economist
lucio.vinhasdesouza@moodys.com
Bart Oosterveld+1.212.553.7914
Managing Director - Sovereign Riskbart.oosterveld@moodys.com
LONDON+44.20.7772.5454

Cyril Audrin+44.20.7772.5328
Associate Analyst
cyril.audrin@moodys.com» contacts continued on the last page

We believe that the anticipated first-time entry of several African countries into the international
debt capital markets will result in increased demand from investors for timely information
regarding sovereign creditworthiness as well as requests for foreign-currency ratings for the
relevant African issuers, particularly in Sub-Saharan Africa (SSA). Over the medium term, we
expect that this issuance trend will strengthen, enabling local governments, corporates andfinancial institutions to better access the international markets.
The region overall has shown considerable resilience to financial shocks during the global
financial crisis, and we expect that investors’ interest in the region will be sustained given thestrong macroeconomic growth outlook for Africa – which we expect to average at 5%-6% overthe coming years. This is despite discussion around the tapering off of US monetary easing
policies, which triggered a search for portfolio diversification and higher yields in a generally low
interest-rate environment.
Sovereigns have other sources of external financings such as multi-/bi-lateral lending, as well as
commercial loans. As such, we consider that funding via international debt securities to finance a
portion of infrastructure needs will likely remain a limited portion of gross capital inflows to theregion.
The region’s domestic capital markets remain at an early stage of development, but several
regional initiatives are underway to further deepen these markets. The interest rates on
Eurobonds are often relatively less expensive compared with domestic issuances. Notable
exceptions are the more mature domestic capital markets that allow for long-term local-currency
sovereign issuance, as is the case in Egypt (Caa1 negative), Nigeria (Ba3 stable), Mauritius (Baa1stable), Kenya (B1 stable), South Africa (Baa1 negative) and Tunisia (Ba2 negative).
Nevertheless, we see significant potential in Africa for increasing the use of international capital
market finance in the medium to long term. In our opinion, African sovereigns will likely leadthe region’s bond issuance, and we believe this will promote further international issuance bygovernment-related institutions – such as strong utility companies using the yield on any existing
government bonds as a benchmark.

SOVEREIGN & SUPRANATIONAL

Table of Contents
International Bond Issuance in Africa is Still at an Early Stage> International capital market issuance by African sovereigns is relatively recent
Box - Reasons for Issuing International Sovereign Bonds> Evolution and drivers of the growing appetite for SSA bond issuances
1.Favourable global credit conditions have contributed to the recent upturn in investor interest in
SSA bond issuance
2. Improving economic conditions also explain high appetite for African debt
Box - Access to international capital markets remains limited in Africa
African governments will continue to rely on other external sources of funding> International issuance is one of many options available to African governments to access externalliquidity> Sovereigns can also be a catalyst for other sources of external liquidity to finance developmental
projects: Official Development Aid (ODA), remittances and Foreign Direct Investments (FD)The absence of fully developed domestic capital markets supports the use of international issuances> Limited in size, domestic capital markets are still mostly illiquid and focused on short-term finance> SSA domestic capital markets remain at different stages of early development> Institutional frameworks are improving, but still remain a constraint …
> …thereby reinforcing the use of international long-term issuance as a medium-term solution
Appendix
Main Sovereign International Bonds Outstanding in Africa
African Public & Publicly-Guaranteed External Debt per country (% of Total, as of end 2011)
Domestic Debt Capital Market in Africa – Government Participation and Maturity

International Bond Issuance in Africa is Still at an Early Stage
International capital market issuance by African sovereigns is relatively recent
African sovereigns’ access to international bond markets is a recent phenomenon and remains
limited. As illustrated by the timeline below, only 14 out of 54 countries in Africa have issued foreigncurrency-denominated instruments on the international market (see Exhibit 1). With the exception of
Tunisia and Morocco (Ba1 negative), which issued international debt in the 1990s, and South Africa,
which has a highly developed domestic capital market, sovereign issuances in Africa actually started in2001 when Egypt issued its first bond.
International issuance in SSA started even more recently when Seychelles issued its first Eurobond
in 2006, followed in 2007 by Congo, Gabon and Ghana (B1 stable). Senegal (B1 stable) tapped theinternational debt markets in 2009, after a pause due to the global financial crisis after Lehman’s
collapse. Nigeria (Ba3 stable) issued its debut Eurobond in January 2011, Senegal returned to market
in May of the same year, followed by Namibia (Baa3 stable) in November with its debut international
issuance. Zambia followed suit in 2012. Year-to-date primary issuance by African sovereigns has
already reached $8 billion, its highest level, due to issuers returning to the international markets(Egypt, Ghana, Nigeria and South Africa), and one debut issuer, Rwanda. By the end of the year,
Senegal is also to tap the international market.

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EXHIBIT 1

African Bond Issuance: A Chronology (Amount in $ million)
North Africa Issuance

SSA Issuance
821

1,667
650

1,250

1,419

554
1,105

1,000

139
750

489

441
2000

2001

2002

2003

2004

2005

2006

SA $750mn
Tunisia ¥150mn

SA €500mn
Tunisia ¥179mn
Egypt $1.5bn

SA $1.25bn
Tunisia $650mn

SA €1.25bn
Tunisia €330mn
Morocco €400mn

SA $1bn
Tunisia €450mn

Tunisia €400mn

SA €750mn
Seychelles $200mn

3,700

LehmanCollapse

2,847

1,979

2,750
4,332

3,234
2,200

2007

2008

SA $1bn
Gabon $1bn
Congo $454mn
Ghana $750mn
Seychelles $30mn
Morocco €500mn
Tunisia ¥185mn
Egypt EGP1mn

2,250

2,437

4,400

2009

2010

2011

2012

2013

SA $2bn
Senegal $200mn

SA $2bnCote$2.3bnd'Ivoire
Egypt $1.5bn
Morocco €1bn

SA $750mn
Nigeria $500mn
Namibia $500mn
Senegal $500mn

SA $1.5bn
Zambia $750mn
Tunisia $500mn
Cote$187mnd'Ivoire
Morocco $2.25bn

SA $2bn
Ghana $1bn
Nigeria $1bn
Rwanda $400mn
Egypt $3.7bn
Angola?
Kenya?
Senegal?

Source: BIS, Bloomberg, Dealogic, Moody’s

We have identified six countries in SSA that we believe will issue inaugural bonds in theinternational markets within the next few years. This list includes: Angola, Cameroon, Kenya,
Tanzania, Uganda and Mozambique (B1 stable). Most of these countries are planning to raise at least$500 million each, which will make them eligible for inclusion in JP Morgan’s Emerging Market
Bond Index (EMBIG). This will not only help raise their visibility with a larger pool of investors, butwill set a benchmark yield for local corporations and banks that wish to issue internationally. Exhibit 2
shows the region’s existing issuers and the year of their latest international issuance, as well as potential
issuers.

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SOVEREIGN & SUPRANATIONAL

EXHIBIT 2

Existing and Potential International Issuers in Africa
Existing Eurobond Issuers

Potential Returning Eurobond Issuers
CFA Franc Zones[2011] Year of latest issuance

Morocco (Ba1-)

Tunisia (Ba2-)[2012][2012][2011][2013]

Rwanda [2013]

Cote d’Ivoire

Uganda[2012]

Ghana (B1)

Kenya (B1)

Nigeria (Ba3) Gabon[2013]

Egypt (Caa1-)

Cameroon

Senegal (B1)[2013]

Potential First-time Eurobond Issuers[2007]

Congo

Seychelles [2010]
Tanzania[2007]

Angola (Ba3+)
Namibia (Baa3)[2011]

Zambia (B1) [2012]

South Africa (Baa1-)

Mozambique (B1)[2012]

Source: Moody’s | +(-) denotes a positive (negative) outlook

Reasons for Issuing International Sovereign Bonds

Capital Expenditure Financing. In 2007, Ghana used bond issuance proceeds to finance energy andtransport projects. The proceeds of Senegal’s $500 million Eurobond issuance will allow for (1) thecontinued construction of a major highway, and (2) the upgrade and repair of the country’s energy
infrastructure. In Zambia, the Eurobond was dedicated to promoting infrastructure development(energy, roads and railways) as well as the social sector (health and education). Namibia used theproceeds of its inaugural Eurobond issuance to diversify its sources of financing and fund its TargetedIntervention Programme for Employment and Economic Growth.
Benchmarking. Benchmarking for the development of the sub-sovereign bond markets was an explicit
goal for both South African and Nigeria. The latter enabled the Nigerian sub-national bond market toovertake South Africa’s market with $2.8 billion outstanding at end-2012 (vs. $1.6 billion in South
Africa). Benchmarking for the corporate bond markets is the most important development that
African economies are experiencing. For instance, Nigeria’s Guaranty Trust Bank successfully offered$500 million a five-year Eurobond four months after the sovereign, followed by Access Finances BV in2012, and then Fidelity Bank plc and First Bank of Nigeria in the same month as the sovereign issued
this year. Following the inaugural $750 million Eurobond from Ghana in September 2007, Ghana
Telecom placed a $200 million issue in the international market two months later. For Angola, thedecision to issue on the international market will mainly be driven by the need to create a benchmark
for other potential issuers such as Sonangol (the national oil company) and domestic banks.

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Debt Restructuring. Four SSA countries have so far used international bond issuance in the context ofdebt restructuring. Seychelles’s 2010 Eurobond was the result of an exchange of new notes (with a facevalue of $168.9 million) against defaulted debt (worth more than $311 million, having originally
defaulted in 2008) at a discount of 50% to face value. The new notes carry a partial guarantee oninterest from the AfDB of up to $10 million. The exchange offer has brought about the cancellation of
approximately $225 in principal, accrued interest and other charges. In 2007, Gabon used its
Eurobond proceeds to buy back at a discount of 15% the country’s outstanding debt to Paris Club
creditors. In the Republic of Congo (2007) and Côte d’Ivoire (2010), debt restructurings took place inthe context of the HIPC Initiative. In 2012, to redress missed payments, 1 Cote d’Ivoire issued $187
million in Eurobonds as part of an exchange program. Most of these issuances were preceded by Paris
Club agreements to seek comparable debt relief from private creditors.
Debt Management. Routine debt management is the most common motivation for the morefinancially developed African countries (i.e., South Africa, Egypt and Morocco) to issue debt in theinternational debt capital markets, and a greater use of such access is being made by returning issuerssuch as Senegal and Ghana . Senegal provided an exchange from the $200 million bond originallyissued in 2009 to a benchmark-eligible instrument. Exchanging the illiquid bond (due 2014) for an
index-eligible benchmark instrument has re-positioned Senegal in the international bond market, andhas also provided it with a liquid and broadly subscribed bond. More recently, Ghana rolled $250
million of its 2007 bonds into the $750 million 2013 issuance. These exchanges not only illustrate theprogress made in building an investor base but also the continued robustness of investor appetite.
In addition to traditional Eurobond issuance, several African governments have used different means
to test market appetite, such as repackaged loans or private placements.
»

In August 2012, Northern Lights III B.V. (Ba3), 2 a special-purpose vehicle listed in the
Netherlands (Aaa negative), issued $1 billion Angola 2019 loan-participation notes (LPNs). The
notes allowed investors to buy into a $1 billion loan made by VTB Capital to the Angolan
government, the ultimate guarantor. This ‘pass-through’ transaction is not considered as a ‘true’
Eurobond despite the LPNs being traded on the secondary market and being referenced in the JP
Morgan flagship emerging sovereign bond indices, EMBI Global and EMBI Global Diversified.

»

In February 2013, Tanzania (NR) raised $600 million in a private placement. This international
debut issuance allowed the country to raise money rapidly, presumably because private placement
could be accomplished with less stringent due diligence compared with a typical Eurobond issue.
It also allows the Tanzanian authorities to gauge potential demand and pricing in light of aplanned Eurobond issuance by the end of fiscal year 2013/14. Despite being privately placed, theseven-year bond was also included in the EMBI Global indices.

»

In September 2013, Mozambique (B1 stable) used a state-backed agency (Ematum) 3 to issue its
first ever US dollar-denominated bond. The funds will be used to purchase a fleet of 27 fishingvessels. The deal 4 is a repackaged unsecured loan from Credit Suisse AG (A1 stable, C-/baa1
stable) that carries an unconditional and irrevocable guarantee from the government.

1

Côte d'Ivoire's Efforts to Redress Missed Payments Support Sovereign Creditworthiness – Oct 20122

Rating Action: Moody’s assigns Ba3 to repack notes issued by Northern Lights III B.V. – Aug 2012
Moody’s assigns B1 rating to Loan Participation Notes Issued by Mozambique EMATUM Finance 2020 B.V. – Sep 2013
The reg S only Security made the notes eligible for inclusion in the EMBI index.

3
4

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SOVEREIGN & SUPRANATIONAL

For these issuers, the leverage operations created traded instruments that allow an assessment ofmarket interest and pricing for potential upcoming Eurobond debut issuances. However, we do notconsider those notes to be ‘true’ Sovereign Eurobonds, because the overall due diligence process wasless stringent, and the authorities did not participate in road shows before the deals, nor complete a fullbook for the instrument. These elements could therefore affect pricing.
A striking feature of SSA bond international issuances is the growing interest from fixed-income
investors. This is in part demonstrated by the oversubscription of certain issues (see Exhibit 3). For
example, the order book following the Zambian road show illustrates to a certain extent theunprecedented interest for sovereign bonds from the continent when the order reached $11.9 billion
for a $750 million Eurobond, i.e. almost 16 times oversubscribed. According to available data, theregion’s 8 bond issuances since 2011 have been oversubscribed by an average multiple of 6.

EXHIBIT 3

International Bond Issuances & Order Book in SSA (excluding South Africa)

2006

2007

2009
2010

2011

2012

2013

Abbreviation
Deal Name

Issue Date

Maturity

Amt Out.
(U$ mn)

Cpn

Yield atIssuance

Seychelles

SEYC’11 (5)27-Sep-06

3-Oct-11

200

9.125

9.466

340

Ghana

GHAN’17 (10)4-Oct-07

4-Oct-17

531

8.5

8.500

3,200

Congo

CONG’29 (22)7-Dec-07 30-Jun-29

445

STEP

8.770

--

Gabon

GABO’17 (10)12-Dec-07 12-Dec-17

775

8.2

8.200

2,300

3.0

46

Senegal

SENE’14 (5)10-Dec-09 22-Dec-14

200

8.75

9.125

--

--

82

Ivory Coast

IVYC’32 (23)16-Apr-10 31-Dec-32

2,332

STEP

17.354

Debt Restructuring

Seychelles

SEYC’26 (16)2-Nov-10

169

5

--

Debt Restructuring

Nigeria

NGER’21 (10)28-Jan-11 28-Jan-21

500

6.75

6.750

1,300

2.6

--

Senegal

SENE’21 (10)13-May-11 13-May-21

500

8.75

8.300

2,400

4.8

66

Namibia

NAMB’21 (10)3-Nov-11 3-Nov-21

500

5.5

5.500

2,500

5.0

70

AngolaANGO’19 (7)16-Aug-12 16-Aug-19

1,000

7

7.000 Loan Participation Notes

ZambiaZAMB’22 (10)20-Sep-12 20-Sep-22

750

5.375

5.625

Ivory Coast

IVYC’32 (20)15-Nov-12 31-Dec-32

187

3.75

3.750

Tanzania

TNZN’20 (7)8-Mar-13 8-Mar-20

600

FLOAT

--

RwandaRWAN’23 (10)2-May-13 2-May-23

400

6.625

6.875

3,500

Nigeria

NGER’18 (5)12-Jul-13

12-Jul-18

500

5.125

5.375

Nigeria

NGER’23 (10)12-Jul-13

12-Jul-23

500

6.375

6.625

Ghana

GHAN’23 (10)7-Aug-13

7-Aug-23

1,000

7.875

8.000

11-Sep-13 11-Sep-20

500

6.305

7.850

Mozambique EMATUM’20 (7)1-Jan-26

Order Book Subscription
Multiple)(US$ mn)

Regional Composition of Order Book

IssuerEuropeo/w: UK

1.1

80

n.a.

10

10

6.0

55

36

41

--

--

--

--

n.a.

54

--

52

9

9

--

--

--

--

--

--

--

--

--

--

--

37

30

4

40

25

5

--

--

--

--

40

n.a.

56

4

Debt Restructuring

--

--

--

--

Private Placement

--

--

--

--

8.8

--

--

--

--

1,770

3.5

37

25

57

6

2,260

4.5

24

16

73

3

2,000

2.7

36

21

60

4

Loan Participation Notes

--

--

--

--

Debt Restructuring

11,90015.9

US Other

Source: Bloomberg, Dealogic, IMF, Miscellaneous Media Sources

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SOVEREIGN & SUPRANATIONAL

Evolution and drivers of the growing appetite for SSA bond issuances
The stylized chart below represents the evolution of Africa’s position according to two criteria, credit
conditions and economic conditions, with the bubble size corresponding to the increase ininternational debt securities issued by African entities.
EXHIBIT 4

African Economic Conditions

No Risk
Discrimination
Exuberance

Beginning of the QE Era(2011-2012)3.

Current Position(2013-2016)

Risk
Differentiation

High Risk
Aversion

African Credit Conditions

Low Risk
Aversion

4.

First Eurobond Issues 2.
(2006-07)
MDRI Initiative(1990s)

No Risk
1.
Discrimination
Panic
Depressed

Challenging

At potential

Very favourable

Source: Moody’s

Dot 1. In the 1990s, the continent registered weak growth in bond issuance, averaging 2.2% in thedecade, and many governments had high debt levels. The situation changed in the second part of thedecade and beginning of the 2000s, with improved growth trends and many countries rapidly reachingcompletion of Heavily Indebted Poor Country Initiative (HIPC) or the Multilateral Debt Relief
Initiative (MDRI) initiatives, leading to gradual debt cancellation.
Dot 2. The first wave of Eurobond debuts that began in 2006-07 led to a gradual easing in terms ofrisk differentiation. This wave was stopped by the Lehman crisis.
Dot 3. After the global financial crisis, credit conditions eased further under favourable monetary
policies implemented in Western countries, leading to a period of very low interest rates. Concurrently,
growth prospects remain elevated for Africa as a whole, with growth forecasts in the medium term ofaround 5%-6%, supporting the second wave of international issuances in the continent.
Dot 4. The gradual normalization of global conditions over the medium term will lead to greater risk
differentiation. It will result in increased demand from investors for timely information regarding
sovereign creditworthiness and increased requests for foreign-currency ratings from a number ofcountries and local issuers in Africa, particularly in SSA. As a global credit rating agency, we have been
expanding our coverage and research on African issuers for several years in response to investors’ andissuers’ needs. We expect that current growth trends will remain at or slightly above their potential,
and that credit-risk differentiation will play a greater role in determining the region’s credit conditions.

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1. Favourable global credit conditions have contributed to the recent upturn in investor interest in SSA
bond issuance
The recent enthusiasm for SSA issuances is likely to be transitory because of the search for portfolio
diversification and higher yields in a generally low interest-rate environment. However, we also view
this trend as a vote of confidence for Africa’s sustainable growth story. We note that the cost offunding in SSA has been similar to that paid by Latin American and Middle Eastern countries atsimilar developmental and credit-quality levels (see Exhibit 5 below).
EXHIBIT 5

EMBI Global / Spread by region above US Treasury
Middle East

Latin America

AfricaAfrica excl. South Africa

Europe

Asia

10
9
8
7
6
5
4
3
2
1
0
Jan-07

Jan-08Jan-09Jan-10Jan-11

Jan-12

Jan-13

Source: JP Morgan

Monetary easing led to reduced interest rates in bond markets, by keeping key interest rates athistorical lows and through unconventional monetary policies such as central banks’ balance-sheet
expansion and quantitative easing (QE). As shown in Exhibit 6, under the Fed’s monetary policy
stance, US government bond yields have been maintained at extremely low levels compared with thepast three decades. It is even more pronounced during this recent period of “unorthodox” monetary
policies. This global impact is also influencing African issuers’ funding costs.
EXHIBIT 6

12

Close Up

21
18
15

10

8

12

8

6

9

6

4

6

4

3

2

0

0

10

2
Fed Effective Rate

0
1980

1985

1990

1995

2000

2005

2010

SEYC'26 (16)NGER'21 (10)SENE'21 (10)NAMB'21 (10)ANGO'19 (7)ZAMB'22 (10)IVYC'32 (20)
RWAN'23 (10)NGER'18 (5)GHAN'23 (10)Yield at Issuanceby African
Eurobond
Issuers

SENE'14 (5)10Y U$ Treasury
Bond

14

GHAN'17 (10)CONG'29 (22)GABO'17 (10)16

SEYC'11 (5)Long-Term View on US Interest Rate Vs. Recent African Eurobond Issuance2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Bloomberg, Moody’s

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The gradual normalization of global credit conditions after the peak in risk averseness in 2008-09 5
has triggered global asset-portfolio reallocations towards riskier assets with higher yields. This has
benefited high-yield bond markets, and especially emerging markets (see Exhibits 7 and 8). The searchfor yield supported frontier markets and African credits, among others, and also attracted issuers insearch of a lower cost of funding. Over the past four years, Africa’s level of issuance activity matchedthat of other regions.
EXHIBIT 7

Primary Issuance In International Debt Market
by EM Sovereigns (US$ bn)
AfricaEuropeLatAm & Caribbean

Middle East

Asia-Pacific

200

150

EXHIBIT 8

EM Debut Eurobond Issuers since 2010(non-exhaustive list)
2010

2011

2012

2013

Albania

Namibia

Angola*Armenia

JordanNigeria

Bolivia

Honduras

Mongolia

Laos2

RomaniaParaguay

Montenegro

1

Russia100

Slovakia (CHF) Rwanda

50

Slovakia3

ZambiaTanzania*

13 YTD

2011

2012

2010

2009

2007

2008

2005

2006

2003

2004

2001

2002

2000

0

Venezuela4
1: RUB offering, 2: Thai Market, 3:Samurai, 4: Kangorou

Source: Dealogic

Despite the uncertainty regarding the timing of Fed tapering or a QE exit, a gradual re-adjustmentof market expectations will likely affect portfolio reallocation. 6 This is exemplified by the negative
evolution of emerging-market bond flows since Q2 2013. As a result, the order book for upcoming
African issuance has diminished, as illustrated by the order book size of the Ghana and Nigeria
issuances after the declaration by the Federal Open Market Committee (FOMC) of May 2013 (seetable 3) and secondary market spreads on existing bonds have widened. The uncertainty surrounding
the timing of Fed tapering is likely to continue to affect the cost of those bond issuances as benchmark
interest rates are trending upwards, thereby reducing the cost advantage of international issuance. An
analysis of African bond yield evolution since the beginning of 2013 corroborates this view, as
illustrated below (Exhibit 9). Those combined effects (reduced order book and increased interest cost)
will impact the market timing of future issues by debut and returning African issuers. Additionally,rising yields could pose challenges for countries seeking to refinance existing debt, as servicing external
debt remains largely untested in an environment of tighter monetary policies.
EXHIBIT 9

Spread Over US Treasury
EGYP'20 (10)CONG'29 (22)GABO'17 (10)IVYC'32 (23)GHAN'17 (10)SOAF'22 (15)

14

7
6

10

5

8

4

6

3

4

2

2

1

0

0

Jan-116

9IVYC'32 (23)GHAN'17 (10)SOAF'22 (15)

8

12

5

EGYP'20 (10)CONG'29 (22)GABO'17 (10)Jul-11

Jan-12

Jul-12

Jan-13

Jul-13Jan-13Mar-13May-13

Jul-13

Sep-13:

As illustrated by the VIX index variation reaching 80 at the heights of the crisis compared to a 16 average from 2003 to 2007
See also US Tapering Effects Likely Relatively Limited and Temporary for Developed and Developing Countries, September 2013

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Spread Over US Treasury
RWAN'23 (10)ZAMB'22 (10)ANGO'19 (7)NAMB'21 (10)SENE'21 (10)TNZN'20 (7)NGER'21 (10)RWAN'23 (10)ZAMB'22 (10)ANGO'19 (7)NAMB'21 (10)8SENE'21 (10)TNZN'20 (7)NGER'21 (10)

6
5

6

4
4

3
2

2

1
0
Jan-11

0Jul-11

Jan-12

Jul-12

Jan-13

Jul-13Jan-13Mar-13May-13

Jul-13

Sep-13

Source: Bloomberg

Overall, however, Africa is the least affected region for a QE tapering in our simulations, given therelatively limited level of financial integration/financial depth (for this last point, see Moody’s report
Private leverage trends in developed and developing economies).
2. Improving economic conditions also explain high appetite for African debt
The African continent is forecast to post strong growth averaging 5%-6% over the coming years,
similar to that achieved in the 2000s, placing the region among the best performers globally. Indeed,
six of the ten countries that are expected to record the fastest growth globally between 2013-18 7 arelocated in Africa. This high appetite is also a vote of confidence for Africa’s positive growth story.

Whilst there are disparities between SSA countries, this forecast is supported by favourable
characteristics and the structural changes African countries have undergone in recent years. Amongthe key variables supporting real growth in Sub-Saharan Africa, we note (1) the growing flows of FDI;
(2) better integration with the global economy (with the share of non-traditional partners increasing
rapidly); (3) elevated commodity prices and substantial natural resources; (4) strong domestic demand
supported by growing income per capita; and (5) the “demographic growth dividend”.
In addition, the balance sheets of the region’s governments have improved dramatically over the past
10 years. Debt relief and debt-clearance mechanisms, such as the HIPC or MDRI, have successfully
reduced the debt burden of many governments, providing them with the scope to finance essential
long-term projects for the economy. The average debt of the region’s governments has fallen to slightly
above 35% of GDP at year-end 2010, from 67% of GDP in 2002.
In addition, the African growth story supports asset managers’ diversification strategies as it allows
exposure to emerging market markets that are decoupled from developed economies. In addition, thenatural resources that are already being exploited (Nigeria, Angola) or have recently been discovered(Kenya, Uganda, Mozambique) support an indirect exposure to commodity cycles.

7

10

IMF, World Economic Outlook, April 2013

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SOVEREIGN & SUPRANATIONAL

International issuances are helping to finance Africa’s still-large developmental and infrastructureneeds
Financing infrastructure projects was the key reason behind recent issuances, and we expect that therising trend in sovereign issuances will continue for the foreseeable future because of the region’s
substantial infrastructure needs. Domestic resources (limited domestic savings and size of thedomestic capital markets) remain insufficient to fund long-term projects. For instance, in 2013, theproceeds of Rwanda’s bond issuance were earmarked for infrastructure projects, such as financing thedevelopment plan for the national airline and for a hydro-power project. The African Development
Bank (AfDB) estimates that the cost of addressing Africa’s infrastructure needs is around $90 billion
annually. AfDB research 8 has highlighted that such deficiencies constrain per capita growth by at least
1%. (For more information on the infrastructure issue in SSA, see our report entitled Closing theInfrastructure Gap: Challenges & Prospects for Sub-Saharan Africa Sovereigns)
In SSA, lack of economic and institutional developments often limits African issuances
From an international investor’s perspective, African bond issues are relatively small in size, which
compound a structural scarcity steaming from the inability of most SSA countries to issue more on asustainable basis.

Only a few countries could raise a $500 million Eurobond internationally without distorting theireconomic and financial equilibrium. To illustrate this, we compare a potential $500 million
Eurobond with GDP, general government revenue and the debt of African governments (see Exhibit10). For illustrative purposes, 9 we present the countries for which a hypothetical $500 million issuance
would represent below 5% of GDP, and a debt increase below 10%. Existing SSA Eurobond issuers
and governments that expressed an interest in issuing internationally are among this sample.
Institutional capacity also limits the capability of African issuers to mobilize resources through theinternational markets, as it requires a certain degree of transparency and sophistication required byinternational investors. The scarcity of African paper is likely to be magnified due to the growing
demand from international investors that are seeking exposure to African debt.
EXHIBIT 10

Mozambique

1.6

1.8

1.8

2.2

2.3

2.6

3.2

3.5

4.1

5.5

7.3

8.2

9.6

10.0

14.1

8.7

11.0

14.6

18.8

Increase in Debt Level (% change)

0.3

1.0

1.2

2.2

4.7

2.1

3.5

3.9

10.0

7.5

6.2

6.2

6.7

7.4

8.3

Nominal GDP (U$ bn, 2013F)

376.0 283.7

125.6

46.5

46.3

42.7

31.9

28.3

28.1

23.1

21.4

19.4

15.8

14.4

12.1

Gov. Revenue (% of GDP, 2013F)

27.8

27.4

40.4

25.9

15.2

21.2

21.4

21.5

18.5

21.6

16.6

29.6

28.7

23.8

21.9

Gov. Debt (% of GDP, 2013F)

42.7

17.9

32.8

47.9

23.0

56.6

44.9

45.4

17.7

28.7

37.6

41.3

47.0

47.2

50.0

Mauritius

1.2

7.1

SenegalCongo, DRC

1.1

4.2

Zambia1.1

1.0

Cameroon

UgandaCôte d’Ivoire

0.4

0.6

Tanzania

0.2

0.5

Ghana

0.1

% of Gov. Revenue

Ethiopia

Angola% of GDP

Kenya

NigeriaSouth Africa

Effect of Hypothetical $500mn Eurobond Issuance

Memorandum:

Source: IMF, Moody’s

8
9

11

African Development Bank, Africa’s Infrastructure: A Time for Transformation, Nov 2009
Note that it does not correspond to any normative view or threshold. It is for illustration only.

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SOVEREIGN & SUPRANATIONAL

The increased number of African Eurobond issuers allows for easier benchmarking, supports pricediscovery and better risk differentiation. Moreover, the inclusion in JP Morgan’s Emerging Market
Bond Index (EMBIG), even of repackaged loans or private placements, supports continued demand
from a larger pool of investors willing to maintain exposure to emerging and frontier markets.
EXHIBIT 11

JP Morgan EMBIG Composition
As of Sept. 20, 2013

AfricaAsia

EuropeLat. America

Middle East

Total Index Market Value (U$ bn)

26.1

96.5

190.5

235.6

16.6

As % of Total

4.6%

17.1%

33.7%

41.7%

2.9%

Source: JP Morgan
EXHIBIT 12

EMBIG Africa Region Sub-index
Evolution

Composition
Index Market Value (US$ bn) [LHS]
Weight (%) [RHS]

Tanzania

30

7

25

6

ZambiaAngolaCote dIvoire

5

20

Egypt

4

15

3

10

South Africa

Gabon

2

Sep-12

Sep-13

Sep-11

Sep-10

Sep-09Sep-07

Sep-08

Sep-05

Sep-06

Sep-04

Sep-020

Sep-030

Sep-01

1

Sep-005

Ghana
MoroccoSenegalNamibia
Nigeria

Source: JP Morgan

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SOVEREIGN & SUPRANATIONAL

Access to international capital markets remains limited in Africa
According to figures provided by the Bank of International Settlements (BIS) concerning the stockof international debt securities issued by governments, corporate and financial institutions, Africa’s
stock is still relatively small in nominal terms compared to that of other emerging regions such as
Latin America, Asia-Pacific or Emerging Europe. Africa’s stock of outstanding debt securities has
risen rapidly over the last decade, more than tripling to $72.8 billion at year-end 2012 (see Exhibit
13).

However, the proportion of debt securities as a percentage of GDP presents a contrasting
picture. While Africa’s international issuance increased in the 1990s, the debt-securities-to-GDP
ratio has remained relatively stable at under 4% throughout the last decade. This is a levelcomparable to Asia-Pacific, but remains much lower compared with emerging Europe or Latin
America. This evolution mostly reflects the importance of South Africa as the largest economy inAfrica (accounting for about a fifth of Africa’s total GDP). If South Africa is excluded from thesample, the share of international issuance to Africa would be considerably lower – with an averagedebt-securities-to-GDP ratio slightly above 1% over the last decade.
Asia’s low level of securities issuance is mainly due to the availability of large pools of domestic
savings upon which borrowers can draw. Moreover, Asia’s capital markets are sufficiently
sophisticated (especially in Korea and China both rated Aa3) to provide long-term financing whenneeded. As a result, Asian international debt securities are mainly issued by financial institutions,whilst Asian governments generally have low borrowing requirements – with generally modest
levels of debt securities issuance to GDP.
In Latin America, the stock of debt issuance has decreased as a percentage of GDP due to rapid
growth and stronger government balance sheets in the region. Nevertheless, governments remain
the main issuers of international bonds. In fact, most Latin American governments, with thenotable exceptions of Argentina, Belize and Ecuador, have been able to issue almost continuously
in the international markets during the past 15 years to support their economic development.
EXHIBIT 13International Debt Securities – Emerging Market ($ billions)
Financial Corporations
% GDP

3.7%

Corporate Issuers

3.7%

Government
9.7%

11.9%

6.0%

5.1%

17.7%

11.3%

700.0
600.0
500.0

2x

400.0

4x

5x

300.0
200.0
100.0

3.5x

0.0
2002

2012
Africa2002
2012
Emerging Europe

2002
2012
Asia & Pacific

2002
2012
Latin America

Source: BIS

13

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SOVEREIGN & SUPRANATIONAL

African governments will continue to rely on other external sources of funding
International issuance is one of many options available to African governments to accessexternal liquidity
Despite the evolving credit conditions and still-large financing needs, international issuance constitutes
one of the options available to African governments to access external liquidity. Others include (1)multilateral financing, (2) bilateral financing, (3) commercial banks loans, and (4) other private
creditors.
Compared with other emerging regions, Africa is the most dependent on multilateral and bilateralfinancing (see Exhibit 14). At year-end 2011, those two sources of external liquidity together
accounted for more than two thirds of public and publicly guaranteed external debts in Africa. Indeed,half of African countries have no other way of accessing external financing, while only 14 out of 54
African countries have been able to issue Eurobonds. Exhibit 33 in the Appendix at the end of thisreport details the composition of external public-sector debt for each African country.
EXHIBIT 14

Public & Publicly-Guaranteed External Debt (% of Total, as end of 2011)
Bonds
0%

Commercial banks
25%

Other private creditors

Multilateral
50%

Bilateral
75%

100%

Lat. America

Middle East
Europe& Cen. Asia
East Asia& Pacific
AfricaSource: World Bank

In order to understand the reasons for using any particular source of external financing, it is necessary
to consider the differing costs, benefits and accessibility of the various funding sources.
(1) International Financial Institutions (IFIs) and Multilateral Development Banks (MDBs)
These accounted for 34% of total external liabilities due by the public sector in Africa at year-end
2011. This figure also illustrates the importance of IFIs, such as the World Bank or the IMF, andMDBs, such as the AfDB in Africa. IFIs and MDBs not only provide financing at a low cost, but
funding is often accompanied by technical assistance. It is also important to stress that, via theirrespective mandates, those institutions share the same objectives as the borrowers, which is tomaximize the development impact of the project that is being financed. IFI loans are generally
structured over a very long term: one example is the AfDB’s $1.5 billion loan extended to Botswana(A2 stable) in 2009 after Lehman’s collapse in 2008. The conditions of the loan were very favourable,with a coupon only 20 basis points (bps) above the London Interbank Offer Rate (LIBOR), andrepayments due over 20 years, with five years’ grace.

14

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SOVEREIGN & SUPRANATIONAL(2) Bilateral financing
This is typically as large as multilateral funding, with long maturities, and is sometimes provided atconcessional rates, similar to some MDB loans. Over the last decade, Brazil (Baa2 stable), China (Aa3stable), India (Baa3 stable) and countries of the Gulf Cooperation Council (GCC) have been
increasingly active in Africa, providing cheap finance often tied to the commercial interests of thedonor country. For example, Angola still has credit lines for infrastructure developments worth billionsof dollars from China (some in exchange for oil) at very low cost. Non-OECD-sourced bilateralfinancing is significant in energy and railway projects, especially in resource-rich countries. Since the‘Arab spring’ in 2011, GCC countries have extended some loans to support Egypt and Tunisia given
their growing current account deficits and declining tourism receipts and foreign direct investment. In
2012, Saudi Arabia (Aa3 stable) and Qatar (Aa2 stable) pledged $5 billion to Egypt, of which $3.1
billion has already been disbursed. Qatar also supported Tunisia through a $500 million private
placement on concessional terms via one of its public-sector financial institutions. More generally,
official development assistance from donor countries has typically made an important contribution to
the water sector and transport infrastructure, particularly in fragile states.
(3) Commercial bank loans
These represented about 11% of Africa’s total public-sector external financing at year-end 2011,
which is low relative to emerging Europe where bank loans accounted for 14%. 10 This financing
often takes the form of syndicated loans extended at a higher cost, and generally comprises mediumterm loans of up to five years. One example of this was the $600 million two-year loan extended to
Kenya by a syndicate of commercial banks at 475 bps above LIBOR. Although this particular loan will
be used to finance infrastructure and boost official reserves, the Kenyan authorities plan to issue abond in the next few years to repay the loan.
(4) International bond issuances
These accounted for about 18% of Africa’s debt stock at year-end 2011. In most mature markets,
this is generally the preferred source of external liquidity as issuances are generally medium- to longterm in nature and no conditionality is attached to the funds. As a country increases its presence in themarkets, the market often becomes a reliable source of funds. More importantly, sovereign bondissuance is generally the first step for a country’s broader access to private capital as it provides abenchmark for other national issuers and acts as a reference point in the evaluation of country risk forinternational investors. Only 14 African countries have issued bonds on the international markets,partly because the process is quite complex. In addition, many of the region’s countries remain unrated
and are still subject to political instability. Moreover, although improving, the institutional frameworkin these countries remains weak by international comparison.

Sovereigns can also be a catalyst for other sources of external liquidity to financedevelopmental projects: ODA, remittances and FDI
Other sources of external financing are available to sovereigns in order to finance developmental
projects, without having a direct impact on the balance sheet. Three common flows are the official
development assistance (ODA), remittances and Foreign Direct Investments (FDI).
FDI has been a significant source of investment that has been promoting further acceleration of
economic growth across the continent over the past decade. To a certain extent, these flows cansubstitute public intervention in the development of infrastructure. Remittances support domestic
consumption and the emergence of a middle class, and could support government financing throughDiaspora bonds. Remittance flows are still on an increasing trend, and will likely offset the gradualdecline in aid flows given the fiscal constraints in donor countries.
10

15

Prior to the crisis-driven deleveraging, the share of commercial loans used to be much larger in emerging Europe and represented a quarter of public external lending.

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EXHIBIT 15

EXHIBIT 16

Additional External Financing Sources(% of GDP, Cumulated)
FDI

Remittances

Additional External Financing Sources (US$ mn)
ODA

ODA

Remittances

FDI

70,00012

60,00010

50,0008
40,000
630,0004

20,0002

10,000
0

0
1980

1985

1990

1995

2000

2005

1980

2010

1985

1990

1995

2000

2005

2010

Source: UNCTAD, OECD, World Bank

Official Development Aid (ODA)
Official donors’ flows are now on a declining trend in real terms as the ongoing financial crisis andeuro area turmoil have prompted several donor governments to tighten their budgets. Up until
2007, ODAs constituted the largest source of external resources. Developmental aid fell by 4% in realterms in 2012, following a 2% decline the previous year. Although the G8 and other major donor
countries have pledged to maintain aid to poor and low-income countries, the current nominal values
of official flows of concessional loans and grants are likely to remain stable at best, given the current
fiscal-austerity environment and growing budgetary pressures.

The most recent Development Assistance Committee (DAC) Survey on Donors’ Forward Spending
Plans estimates that future aid for all DAC members and major non-DAC and multilateral donors is
expected to remain stable over the years 2014-16. In addition, this trend is no different for Africancountries compared to others, as Country Programmable Aid (CPA) is forecast to stagnate forcountries with the largest Millennium Development Goals (MDG) gaps and poverty levels, including
for sub-Saharan African countries such as Burundi, Chad, Madagascar, Malawi and Niger.1 Official
flows as a percentage of African GDP will thus continue to fall slowly, as they have done since 2001.
ODA remains an important source of financing for some countries, like the Democratic Republic of
the Congo (B3) or Mozambique (B1), where it exceeds 20% of GDP. The importance of the US andEurope remains essential in this regard.
EXHIBIT 17

EXHIBIT 18(Avg 2007-11, US$ mn)(Avg 2007-11, % GDP)Top 10 African ODA
0

1,000

2,000

3,000

% GDP

0

ODA (Sending Countries/Institutions)% of Total ODA received by African countries

10 20 30 40 50 60 70 80

US$ mn0Ethiopia

12%

Liberia930

USA

Congo, DRC

22%

Burundi554

EU Inst.

Tanzania13%São Tomé

51

IDA

Mozambique20%

Cong, DRC

2,911

FranceNigeria1%

Mozambique

1,962

UK

Kenya

6%

Rwanda977

Germany

Uganda11%

Sierra Leone

453

AfDF

Ghana

5%

Malawi

853

Japan

Morocco1%

Côte d'Ivoire

Source: OECD

16

EXHIBIT 19

Top 10 African ODA

OCTOBER 8, 2013

5%

Guinea-Bissau
Cape Verde

Source: OECD

132
232

5

10

15

20

CanadaGlobal Fund

Source: OECD

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SOVEREIGN & SUPRANATIONAL

Remittances
Remittances have become the largest source of external financing in Africa since 2010. These flows
have been resilient to the global crisis and continue to increase both in nominal and relative terms,
outpacing both ODA and FDI. Workers’ remittances play an important role in helping to financecurrent account deficits as well as domestic consumption in many African countries. However, there
are regional differences in terms of remittances. For instance, North and West Africa account for 80%
of total remittances to the continent and, for historical reasons, both regions’ diasporas are mainly
concentrated in Europe. As a result, these two regions are more exposed to economic conditions in
Europe given that increased unemployment in host countries is likely to restrain remittance flows.

Remittances represent an untapped resource for the governments in terms of issuing diaspora bonds,
but issuance on the continent remains limited. The AfDB estimates 11 that SSA countries could raise
between $10-$17 billion per year (about 1.3% of the region’s GDP) through such bonds. They arethus a potential source of longer-term financial resources for infrastructure, complementing remittanceflows that typically support consumption or social expenditures. Ethiopia was a pioneer in Africa on
issuing diaspora bonds to finance infrastructure. Its Millennium Corporate Bond, which targeted both
Ethiopians at home and abroad, was aimed at raising capital for the state-owned Ethiopian ElectricPower Corporation. 12 Kenya, Nigeria, Uganda and Zambia have used or are in the process of issuingsuch instruments.
EXHIBIT 20

EXHIBIT 21(Avg 2008-12, US$ mn)(Avg 2008-12, % GDP)Top 10 African Remittances
0

5,000

10,000EXHIBIT 22

Top 10 African Remittances

15,00020,000% GDP

Nigeria9%0LesothoRemittances by Countries of Origin% of Total Remittances sent to Africa, 2012

10

20

30

US$ mn

0

597

USA

Egypt

6%

Liberia

169

Saudi Arabia

Morocco7%

Senegal1,430FranceTunisia

5%

Togo

333

UK

Algeria1%

Gambia88

JordanSenegal11%

Cape Verde

156

Italy

South Africa

0%

Nigeria

19,716

Spain

Uganda5%

Morocco

6,748

Libya

Kenya

2%

Egypt

12,627

KuwaitLesotho29%

Guinea-Bissau

Source: World Bank

Source: World Bank

5

10

15

Other North

46

Source: World BankFDI
FDI in Africa has been on an upward trend since 2000, partly reflecting the growing share of funds
from China. 13 As the region still attracts less than 5% of global FDI projects, despite one of thehighest returns on investment in the world, Africa’s potential for further expansion in FDI issignificant. Reflecting increased interest among foreign investors, annual flows of FDI are expected tocontinue to grow over the medium term.

Governments can influence FDI by improving the business environment, as well as being a catalyst
for those flows, especially through PPP. For instance, infrastructure PPP in SSA remains limited insize compared with other emerging markets: the stock of PPI represented about $100 billion over
2001-2011, or 8% of total PPI globally. PPI presents opportunities as it leverages the private sector’s
11

African Development Bank, Diaspora Bonds: Some Lessons for African Countries, Africa Economic Brief, Vol.3 Issue 3, December 201212

In 2011, the Ethiopian government issued a second diaspora bond to secure financing of the Grand Renaissance Dam project.

13

Chinese investment in infrastructure in Sub-Saharan Africa exceeded that made by the World Bank as early as 2005.

17

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SOVEREIGN & SUPRANATIONAL

experiences and skills to develop and maintain infrastructure, and allows the risks associated withprojects to be shared. The slow development highlights two key constraints in SSA: low institutional
capacity and the lack of adequate PPP regulation. Most of the FDI is directed towards the extractive
industries, as is the case in Congo, Mozambique, etc. However, FDI could also be used to finance theinfrastructure gap in Africa. Although they started at a similar level in 2001, other regions, such as
South Asia, were able to attract substantial amount of FDI in energy and transport, as shown in thechart below.
EXHIBIT 23

Private Participation in Infrastructure (2002-12, % of GDP)
Telecom

Transport

Water and sewerage

East Asia and Pacific

MENA

EuropeEnergy
25
20
15
10
5
0

LatAm

SSA

South Asia

Source :World Bank PPI Database

Traditional trading partners remain the largest contributors of FDI flows. However, it is important
to note the increase in flows from emerging countries, such as Malaysia (A3 stable), South Africa or
China, 14 and we expect that the trend will continue as Africa becomes more integrated within the
global trade framework. This development led Mauritius (Baa1 stable) to position itself as aninvestment gateway between Asia and Africa further to extending its network of double tax treaties inAfrica. Mauritius hopes to replicate its success vis-à-vis Asia with Africa (for instance, 40% of FDI
towards India went through Mauritius).
EXHIBIT 24

EXHIBIT 25(Avg 2008-12, US$ mn)(Avg 2008-12, % GDP)Top 10 African FDI Receipients002,000 4,000 6,000 8,000 % GDP

Nigeria4%

LiberiaSouth Africa

2%São Tomé and Príncipe

Egypt

3%

Congo-Brazaville

Libya

4%

Mozambique

Ghana

8%

Congo-Brazaville

18

FDI by Countries of Origin% of Total FDI sent to Africa

10

20

30

40 US$ mn

0563

France

46

USA

2,482

UK

2,077

Malaysia

Congo, DRC

2,066

South Africa

20%

Seychelles

133

China

Algeria

1%

Niger

786

Germany

Morocco2%

Sierra Leone

371

Switzerland

Mozambique

16%

Equatorial Guinea

1,533

Italy

Congo, DRC

15%

Madagascar

950

Singapore

Source: UNCTAD

14

EXHIBIT 26

Top 10 African FDI Receipients

Source: UNCTAD

5

10

15

20

Source: UNCTAD

Despite the low level of Chinese FDI compared to other countries, its role should be considered in coordination with other external financial flows, such as grants andconcessional lending, supporting the significance of China as a financier in Africa.

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SOVEREIGN & SUPRANATIONAL

The absence of fully developed domestic capital markets supports the use ofinternational issuances
Limited in size, domestic capital markets are still mostly illiquid and focused on shortterm finance
Many African countries have been seeking to develop their domestic capital markets. With the
exception of South Africa and a handful of other countries that have relatively well-establisheddomestic capital markets, most countries in Africa are challenged to raise affordable long-term financeon their domestic capital markets. Government domestic long-term issuances have remained rare andrather expensive due to macroeconomic instability, the low level of domestic savings and the lack of arobust legal and regulatory framework within each country. In most cases, these factors have led
governments to issue short-term instruments only, using mostly Treasury-bills and short-term bondsof up to two years.
Overall, domestic capital markets remain limited in size. South Africa and Egypt benefit from thelargest fixed-income markets in Africa, followed by Nigeria, Morocco and Kenya. The map below
shows the depth (in nominal terms) of the different fixed-income markets.
EXHIBIT 27

Domestic Debt Capital Market in Africa
Size of Outstanding Debt in USD billion (as of beginning of Sept. 2013)

Below $1bn

Btw $1bn & $10bn

MoroccoBenin

Btw $10bn & $100bn

Above $100bn

Tunisia
Egypt

Mali
SenegalGambiaBurkina Faso
Sierra Leone
Liberia
Ivory Coast
Ghana Togo

Niger
Chad
Cameroon
RwandaUgandaKenya
Nigeria
Gabon
Congo
AngolaZambiaTanzania
Malawi
Mauritius

Namibia
Botswana

Mozambique

South Africa

Zimbabwe

Swaziland
LesothoNote: For members of the WAEMU (Benin, Burkina Faso, Guinea Bissau, Cote d’Ivoire, Mali, Niger, Senegal and Togo) and CEMAC (Gabon, Central African
Republic, Chad, Congo, Equatorial Guinea), domestic markets do not correspond to the national but regional markets that constitute their respective West
and Central CFA Franc zones. | Source: Bloomberg

19

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SOVEREIGN & SUPRANATIONAL

African capital markets remain dominated by sovereign issuances, underlying the importance ofsovereigns in deepening domestic capital markets by creating a yield curve. Financial institutions are
the second-largest domestic issuers in countries such as Egypt, Kenya, Mauritius and Nigeria, where
the domestic market is more developed. Non-financial corporates are able to issue on a regular basis
only in the most sophisticated markets.
EXHIBIT 28

Domestic Debt Capital Markets (% of GDP)
Governments

Financials

Non-FinancialCorporates

60
50
40
30
20
10
0

Source: Bloomberg, IMF, Moody’s

Although some countries have been able to issue 10-year paper or above, long-dated instruments
remain scarce, thereby limiting the evolution of a yield curve. Most debt remains constrained at the
short end of the curve, at one year or below. South Africa‘s domestic capital market has greater depth,
allowing the South African authorities to raise very long-dated paper (see exhibits 29 and 30 on the
distribution of instruments by maturity in Africa).
EXHIBIT 29

EXHIBIT 30

Government Domestic Bond Issue

Government Domestic Bond Issue

Distribution by Term (Nb)Distribution by Term (USD mn)

Africa (excluding SA)

Africa (excluding SA)

SA

SA

120,000

800
700

100,000

600
80,000500

60,000400
300

40,000200
20,000

100

0

0
0

5

Source: Bloomberg, Moody’s

10

15

20

25

30 <...

0

5

10

15

20

25

30 <...

Source: Bloomberg, Moody’s

The absence of a long yield curve in these countries can be attributed to (1) the lack of control over
inflation, (2) interest-rate and inflation volatility, (3) public finance risk and (4) the lack of a “buyside”. This lack of a long yield curve poses a number of constraints. For example, the absence of longterm government bonds prevents local banks from pricing long-term lending and also means there isno market benchmark for borrowers to use. As a consequence, long-term debt is generally non-existentin these countries, which is problematic for domestic institutional investors such as pension funds and

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SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL

insurance companies. This reliance on short-term funding results in higher rollover risk and greater
vulnerability. However, it is important to stress that most countries in Africa are making progress
towards addressing these factors, which are important for both international and domestic issuances.
We also note that almost all of the potential Eurobond issuers that we have identified are among thecountries able to issue locally for terms longer than 10 years. These countries include Tanzania,
Uganda and Mozambique. We also note a tangible correlation between the development of domestic
debt markets and international debt issuance, mainly due to the development of dedicated andcompetent organizations (such as DMOs) to manage debt issuance and investor relations.

SSA domestic capital markets remain at different stages of early development
As per the classification established by the AfDB, 15 there are 11 countries whose domestic capital
markets range from “developing” to “advanced”; the rest of the continent’s domestic capital markets
are at a relatively early stage of development. South Africa is classified as “highly developed”; Namibia,
Egypt, Mauritius and Botswana as “advanced”; and Morocco, Tunisia, Nigeria, Ghana and Kenya as“developing”.
Several regional initiatives have been put in place to foster the development of domestic capital
markets. Launched by the AfDB as early as 2008, the African Financial Markets Initiative (AFMI) is
designed to further develop local-currency bond markets on the continent. Through this initiative, the
AfDB aims to strengthen African economies by reducing their dependency on foreign-currencydenominated debt. It seeks to increase the availability of financing to the corporate sector and act as acatalyst for regional integration. The initiative is based on two complementary pillars: (1) the African
Financial Markets Database, a comprehensive source that provides updated information on African
local-currency bond markets; and (2) the African Domestic Bond Fund. 16 The latter is an index
tracker fund that will invest in local-currency-denominated sovereign bonds, allowing the deepening ofdomestic bond market through longer-dated debt instruments, and contribute to the enlargement of
the domestic bond markets’ investor base.
Concurrently with this initiative, some supranationals are also issuing debt on domestic capital
markets. For instance, the IFC (Aaa) sold the first bond by an international issuer on Zambia’s
domestic bond market in late September 2013. It is the first issuance from the IFC’s pan-Africa
domestic medium-term note (MTN) program. The Washington-based institution has already issued in
the Nigerian and Moroccan markets. Its parent, the IBRD (International Bank for Reconstruction &Development, Aaa) has already raised funds in the domestic capital market of Botswana, Ghana,
Nigeria and Uganda. The East African Development Bank (Ba1), which is the East African
Community’s development institution, was the first issuer in domestic capital markets in eastern
Africa. In September 2012, the bank initiated a $120 million programme to mobilise local-currency
funds via an MTN program in all eastern African markets. This is the first regional MTN throughwhich EADB is accessing different regional markets in different currencies simultaneously.

15

The AFMI Feasibility Study of 2011 ranks countries based on their aggregate score under the following criteria: (i) macroeconomic environment (monetary and fiscal
policy); (ii) legal and regulatory framework; (iii) bond market infrastructure; (iv) issuers and issuing strategy; (v) investor base; and (vi) active participation of economic
agents.

16

The latter project led to the constitution of multi-disciplinary working groups serving as a platform for policy dialogue and knowledge-sharing.

21

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SOVEREIGN & SUPRANATIONAL

Institutional frameworks are improving, but still remain a constraint…
The ability of the region’s countries to raise affordable long-term financing in the domestic market
has proved challenging. However, the emergence of more robust government institutions that foster
the development of domestic capital markets have strengthened this ability. This aspect is also
important for international issuance. The quality of these institutions plays an important role in thedevelopment of long-term financing aided by (1) the adoption of transparent and efficient trading andsettlement systems; (2) the effective rule of law and property rights; (3) the introduction of accounting
standards; and (4) the quality of financial reporting. In this regard, our credit ratings can help
differentiate the creditworthiness of the region’s countries and support the development of domestic
capital markets.
Between 2000 and 2012, World Bank governance indicators remained broadly stable for the region
overall, but improved substantially in those countries that we identified as potential Eurobond
issuers (see Exhibit 31). The latest African Eurobond issuer to date, Rwanda, has been a strong
performer in terms of improving its institutional framework over the last decade, albeit starting from a
low level.
EXHIBIT 31

World Bank Governance Indicators (Average of six indicators)*
2002

2012

1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0

Best Performers

Mauritius

Botswana

Cape Verde

Namibia

Seychelles

South Africa

Ghana

ZambiaRwandaMalawi

UgandaSierra Leone

Liberia

AngolaBurundi

CAR

Libya

BottomZimbabwe

Eritrea

Sudan

Congo, DRC

Somalia

SSA

-2.5

Top

Source: World Bank, *: Voice & Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption

The growing interest and challenges in establishing a sukuk market are also illustrative of improved
institutional strength and developing capital markets. This type of issuance requires the adoption of a
specific regulatory framework. Egypt, Morocco and Tunisia made significant progress this year in
adopting adequate legislation to facilitate the issuance of Islamic bonds, whilst Senegal is aiming to bea regional hub for Islamic finance, although it still faces legislative and regulatory hurdles. Nigeria andSouth Africa already have the relevant legislation in place and announced their intention to issue
Islamic bonds to tap Middle Eastern and Asian investors as well as domestic markets. Currently, only
Sudan and the Gambia have issued sukuk instruments, although those issuances remain limited in size
and are geared towards domestic capital markets.

22

OCTOBER 8, 2013

SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL…thereby reinforcing the use of international long-term issuance as a medium-term
solution for many countries
The availability of long-term funding at a lower cost than is available in domestic markets generally
explains why issuing long-term foreign-currency instruments remains attractive to African
governments, despite the associated exchange-rate risk. While these countries are making progress
towards developing their local capital markets, we believe that the requirements needed to issue
internationally will remain easier to meet in the short to medium term. Over the medium term,
issuance by the region’s sovereigns will promote further issuance from government-related institutions,
local governments, corporate and financial institutions, thus enabling these institutions to better accessinternational markets using the existing government bonds as a benchmark.
Financial institutions are the largest issuers, especially in South Africa, Nigeria and Mauritius given
the depth of those markets and their respective regional status. Such institutions include: Standard
Bank (Baa1 negative, C-/baa1 negative) Firstrand Bank(Baa1 negative, C-/baa1 negative), ABSA Bank
(Baa1 negative, C-/baa1 negative) in South Africa, First Bank of Nigeria, Access Bank and Guaranty
Trust Bank in Nigeria, a series of financial institutions and special-purposes vehicles in Mauritius andTranscentury investment company in Kenya. Corporate issues remain limited to key institutions orlarge companies in the largest African markets, such as South Africa or Nigeria. Contrary to South
Africa where a diversified pool of companies has tapped the international markets, corporate issuers
tend to be concentrated in key economic sectors, such as the oil industry in Nigeria with Sea Trucks
Group or Afren. 17

17

23

Other examples include cruise-liners and maritime transport services in Liberia with series of issuances by Royal Caribbean and Altus Group in the mid-2000s, orOrascom group in Egypt.

OCTOBER 8, 2013

SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL

Appendix
EXHIBIT 32

Main Sovereign International Bonds Outstanding in Africa
IssuerName

Cpn

Issue Date

Maturity

Amt Out(M)Curr

Mty Type

Cpn Freq

SeriesGoverning Laws

Bloomberg Id

Angola1

ANGO'19 (7)7

8/16/2012

8/16/2019

1,000,000

USD

SINKING FUNDQUARTERLY

REGS

--

EJ321611

Congo (Rep. of)

CONG'29 (22)STEP

12/7/2007

6/30/2029

444,822USD

CALL & SINKSEMI ANNUAL

144A

--

EH125380

Egypt

EGYP'14 (2)4.25

5/28/201311/28/2014

2,700,000

USD

BULLET

SEMI ANNUAL

EMTN

--

EJ697642

Egypt

EGYP'16 (3)3.5

7/1/2013

7/1/2016

1,000,000

USD

BULLET

SEMI ANNUAL

EMTN

--

EJ746456

Egypt

EGYP'20 (10)5.75

4/29/2010

4/29/2020

1,000,000

USD

BULLET

SEMI ANNUAL

144A

New York

EI181395

Egypt

EGYP'40 (30)

6.875

4/29/2010

4/30/2040

500,000

USD

BULLET

SEMI ANNUAL

144A

New York

EI231566

Gabon

GABO'17 (10)8.2

12/12/2007

12/12/2017

774,903USD

BULLET

SEMI ANNUAL

144A

New York

EH112923

Ghana

GHAN'17 (10)8.5

10/4/2007

10/4/2017

530,510USD

BULLET

SEMI ANNUAL

144A

EnglandEG878024

Ghana

GHAN'23 (10)7.875

8/7/2013

8/7/2023

1,000,000

USD

BULLET

SEMI ANNUAL

144A

England

EJ770661

Ivory Coast

IVYC'32 (20)

3.75

11/15/2012

12/31/2032

186,755

USD

SINKING FUND

SEMI ANNUAL

NOV.

--

EJ442366

Ivory Coast

IVYC'32 (23)STEP

4/16/201012/31/2032

2,332,149

USD

SINKING FUND

SEMI ANNUAL

144A

--

EI222667

Morocco

MORO'17 (10)5.375

6/27/2007

6/27/2017

500,000

EUR

BULLET

ANNUALREGS

EnglandEG585369

Morocco

MORO'20 (10)4.5

10/5/2010

10/5/2020

1,000,000

EUR

BULLET

ANNUAL--

England

EI420673

Morocco

MORO'22 (10)

4.25

12/11/2012

12/11/2022

1,500,000

USD

BULLET

SEMI ANNUAL

144A

England

EJ451426

Morocco

MORO'42 (30)

5.5

12/11/2012

12/11/2042

750,000

USD

BULLET

SEMI ANNUAL

144A

England

EJ472155

Mozambique2

EMATUM’20 (7)6.305

11/09/2013

11/09/2020

500,000

USD

SINKABLE----

England

EJ8225140

Namibia

NAMB'21 (10)5.5

11/3/2011

11/3/2021

500,000

USD

BULLET

SEMI ANNUAL

144A

England

EI859210

Nigeria

NGER'21 (10)6.75

1/28/2011

1/28/2021

500,000

USD

BULLET

SEMI ANNUAL

144A

England

EI546777

Nigeria

NGER'18 (5)5.125

7/12/2013

7/12/2018

500,000

USD

BULLET

SEMI ANNUAL

144A

--

EJ743567

Nigeria

NGER'23 (10)6.375

7/12/2013

7/12/2023

500,000

USD

BULLET

SEMI ANNUAL

144A

--

EJ742537

RwandaRWAN'23 (10)6.625

5/2/2013

5/2/2023

400,000

USD

BULLET

SEMI ANNUAL

144A

England

EJ640721

Senegal

SENE'21 (10)8.75

5/13/2011

5/13/2021

500,000

USD

BULLET

SEMI ANNUAL

144A

England

EI668655

South Africa

SOAF'20 (20)3.8

6/1/2000

6/1/2020

30,000,000

JPY

BULLET

SEMI ANNUAL

EMTN

--

EC758225

South Africa

SOAF'21 (20)

3.8

6/12/2001

9/7/2021

30,000,000

JPY

BULLET

SEMI ANNUAL

EMTN

--

EC758257

South Africa

SOAF'14 (10)6.5

6/2/2004

6/2/2014

1,000,000

USD

BULLET

SEMI ANNUAL--

New York

ED484140

South Africa

SOAF'16 (10)

4.5

4/5/2006

4/5/2016

750,000

EUR

BULLET

ANNUALEMTN

New York

EF349039

23

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SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL

EXHIBIT 32

Main Sovereign International Bonds Outstanding in Africa
IssuerName

Cpn

Issue Date

Maturity

Amt Out(M)Curr

Mty Type

Cpn Freq

SeriesGoverning Laws

Bloomberg Id

South Africa

SOAF'22 (15)5.875

5/30/2007

5/30/2022

1,000,000

USD

BULLET

SEMI ANNUAL----

EG460005

South Africa

SOAF'19 (10)6.875

5/27/2009

5/27/2019

2,000,000

USD

BULLET

SEMI ANNUAL--

New York

EH837830

South Africa

SOAF'20 (10)5.5

3/9/2010

3/9/2020

2,000,000

USD

BULLET

SEMI ANNUAL--

New York

EI171876South Africa

SOAF'41 (30)

6.25

3/8/2011

3/8/2041

750,000

USD

BULLET

SEMI ANNUAL--

New York

EI595689

South Africa

SOAF'24 (12)4.665

1/17/2012

1/17/2024

1,500,000

USD

BULLET

SEMI ANNUAL--

New York

EI879470

South Africa

SOAF'25 (12)5.875

9/16/2013

9/16/2025

2,000,000

USD

BULLET

SEMI ANNUAL--

New York

EJ825230

Tanzania

TNZN'20 (7)FLOAT

3/8/2013

3/8/2020

600,000

USD

SINKING FUND

SEMI ANNUAL

REGS

--

EJ566341

ZambiaZAMB'22 (10)5.375

9/20/2012

9/20/2022

750,000

USD

BULLET

SEMI ANNUAL

144A

England

EJ363895

3

1: Via Northern Lights I; 2: EMATUM Finances 2020 BV; 3: Private Placement | Source: Bloomberg, Dealogic

23

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SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL

EXHIBIT 33

African Public & Publicly-Guaranteed External Debt per Country (% of Total, as of end 2011)
Bonds
0%

Commercial banks
25%

Other private creditors

Multilateral
50%

Bilateral
75%

100%

South Africa
Seychelles
Gabon
Tunisia
SenegalGhana
Egypt
Nigeria
MoroccoAngolaCongo, Rep.
Sierra Leone
Sudan
Ethiopia
Zimbabwe
Tanzania
Swaziland
Mozambique
Mauritius
Kenya
Algeria
Djibouti
LesothoCameroon
GambiaCape Verde
Cote d'Ivoire
MalawiMadagascar
Guinea
Mali
Chad
CAR
Eritrea
ZambiaBurkina Faso
Congo, DRC
Botswana
UgandaRwandaBenin
BurundiComoros
Niger
Mauritania
Togo
Guinea-Bissau
Liberia
Sao Tome and Principe

Source: World Bank

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SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL

EXHIBIT 34

Domestic Debt Capital Market in Africa
Gov. Dom. Mkt Debt
US$ mn% GDP

Avg Maturity

Max Maturity

South.Africa

121,106

32

21

112

Egypt

116,353

44

3

20

Nigeria

54,29719

420

Morocco40,374

38

8

30

Kenya

11,377

24

8

30

Ghana

6,503

15

1

3

Mauritius

4,285

35

6

84

Tunisia

4,001

8

9

15

Tanzania

3,024

9

4

10

Malawi

2,564

67

4

5

Ivory Coast

2,548

9

4

7

Zambia

2,530

11

3

15

Uganda

2,475

12

3

10

Namibia

1,753

14

7

22

Botswana

1,550

8

5

21

Senegal

1,448

10

4

10

Mozambique

1,377

9

2

10

Angola

873

1

8

12

Burkina.Faso

389

3

7

10

Benin

308

4

5

10

Mali

306

3

4

10

Cameroon

301

1

5

5

Togo

281

7

4

5

Swaziland

265

7

2

7

Sierra Leone

212

5

1

1

Seychelles

200

18

2

13

Gambia

193

19

1

1

Gabon

100

1

6

6

Rwanda

85

1

1

5

Lesotho

84

3

2

10

Niger

33

0

7

7

Cape Verde

20

1

8

10

Liberia

13

1

0

0

Source: Bloomberg, Moody’s

27

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SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL

Moody’s Related ResearchSpecial Comments:»

Closing the Infrastructure Gap: Challenges & Prospects for Sub-Saharan Africa Sovereigns, May
2013 (154234)»

Sub-Saharan Africa Outlook: Commodity Price Vulnerability Balanced by Favorable Economic
Outlook and Gradual Structural Transformation, May 2013 (154523)»

International Sovereign Issuance in Africa 2012/2013 - a Rating Agency Perspective, October
2012 (145826)»

Africa: Despite Transmission Risks from European Sovereign Debt Crisis, Stable Growth Likely,
September 2012 (145253)»

Sub-Saharan Africa: A Sovereign Overview, May 2012 (141050)»

The Private Sector – a catalyst for building Institutional Capacity and Creditworthiness ofSovereigns in Sub-Saharan Africa, December 2011 (136113)»

International Sovereign Issuance in Sub-Saharan Africa: A Rating Agency Perspective, October
2011 (136405)»

South African Banks’ Reduced Losses Are Credit Positive, August 2011 (135521)»

South African Municipal Bonds: A New Asset Class with Growth Potential, May 2011 (133478)»

The South African Market: Impact of the Crisis and 2011-12 Prospects, June 2011 (133697)»

Moody’s Ratings for South African Municipalities, September 2011 (127948)»

South Africa’s Rejection of Mine Nationalizations, February 2012 (139767)»

South African Budget 2012/13: A Clash of Ambitions, February 2012 (140151)»

Key Drivers Behind Moody’s Decision to Change South Africa’s Outlook to Negative, November
2011 (137282)

Issuer Comment:»

Angola’s Creation of a Sovereign Wealth Fund Is Credit Positive, October 2012 (146749)

Rating Methodology:»

Sovereign Bond Ratings, September 2013 (157547)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication ofthis report and that more recent reports may be available. All research may not be available to all clients.

28

OCTOBER 8, 2013

SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014

SOVEREIGN & SUPRANATIONAL» contacts continued from page 1

LONDON+44.20.7772.5454

Lucie Villa+44.20.7772.5326
Assistant Vice President-Analyst
Lucie.villa@moodys.com
Alexandra Mousavizadeh+44.20.7772.5567
Assistant Vice President-Analyst
alexandra.mousavizadeh@moodys.com
Sarah Carlson+44.20.7772.5348
Vice President - Senior Credit Officer
sarah.carlson@moodys.com
Yves Lemay+44.20.7772.5512
Managing Director - Banking
yves.lemay@moodys.com
FRANKFURT

Report Number: 159012+49.69.70730.700

Dietmar Hornung+49.69.70730.790
Associate Managing Director
dietmar.hornung@moodys.com

Authors
Aurelien Mali
Cyril Audrin

EditorGregory Davies

Production Associates
Prabhakaran Elumalai
Alisa Llorens© 2013 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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SPECIAL COMMENT: INTERNATIONAL SOVEREIGN ISSUANCE IN AFRICA 2013/2014