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Africa Nations Warned on Bond Risks as Europe Slumps

African nations that plan to sell a record amount of Eurobonds in the next two years risk higher debt costs as the European debt crisis worsens, threatening economic stability, according to the African Development Bank and investors.

Policy makers from Africa attending the AfDB’s annual meeting in Arusha, Tanzania, this week were cautioned against racking up debt in the face of a slowdown in Europe. AfDB President Donald Kaberuka warned member nations to avoid “hubris” because of recent discoveries of major oil, gas and other commodity deposits.

Rwanda, Tanzania and Uganda, which is set to become Africa’s newest oil producer this year, may sell more than $800 million in Eurobonds in the next two years, marking the first time the east African nations raise money in foreign debt markets. Zambia, the continent’s largest producer of copper, plans to sell its first global bond this year.

“Across Africa, save for a few outliers, there is much of a ‘feel good factor’,” Kaberuka said yesterday. “Nonetheless, today I want to draw a note of caution. This is no time for hubris. It is rather a moment of sober reflection.”

Europe’s debt crisis is undermining economic growth and trade in Africa at a time when governments have less fiscal room to stimulate demand. Nations from South Africa to Rwanda to Nigeria have already cut growth forecasts in the face of a possible recession in Europe, Africa’s largest trading partner.
Growth Under Pressure

“The exuberance is slightly more than the reality,” Ravi Bhatia, a sovereign credit analyst at Standard & Poor’s, said in an interview on May 31 in Arusha. “As a whole we are talking about 5 percent growth for the continent and that is really not enough to have a sustained and tangible impact on poverty levels.”

East African nations are raising funds to help pay for power, road and other infrastructure projects to help sustain faster economic growth.

Rwanda, which earns most of its foreign currency from tourism and coffee exports, plans to sell $300 million of Eurobonds next year, Finance Minister John Rwangombwa said in an interview on May 30 in Arusha. Uganda, where Tullow Oil Plc (TLW) and its partners have found 2.5 billion barrels of crude, plans to sell its first dollar-denominated debt in the next two to three years, Deputy Treasury Secretary Keith Muhakanizi said in an interview on May 29.
Kenya Bond

“Market conditions at the moment are fairly volatile,” Stuart Culverhouse, chief economist at investment bank Exotix Ltd., said in a May 31 phone interview from London. Governments may postpone the bond sales until there are “more benign” conditions.

Kenya, the largest economy in east Africa, will probably sell a bond of a minimum of $500 million in about a year’s time to help repay debt and finance infrastructure, Finance Minister Robinson Githae said in an interview on May 30 in Arusha. He declined to give further details of the bond.

Slower economic growth, a weaker currency and a wider current account deficit are downside risks to a sale, Yvonne Mhango, an analyst at Renaissance Capital in Johannesburg, said in an e-mail. The government on May 15 lowered its 2012 economic growth forecast to between 3.5 percent and 4.5 percent, from a previous projection of 5.2 percent.

While borrowing costs have fallen this year for African nations, a worsening crisis in Europe threatens to drive costs higher and reduce demand, Carmen Altenkirch, a credit analyst at Fitch Ratings, said in an interview on May 28 in Arusha.
Bond Yields

Yields on Ghana’s $750 million Eurobonds due 2017 have declined 55 basis points this year to 6.076 percent. Ghana has the same sovereign credit rating as Rwanda of B at Standard & Poor’s.

Nigeria, the continent’s biggest oil producer whose rating matches Kenya and Uganda’s at S&P, sold $500 million of 6.75 percent Eurobonds in January 2011. The yield on the debt, which matures in 2021, has fallen 32 basis points, or 0.32 percentage point, to 5.881 percent this year.

Tanzania plans to get a credit rating and sell its first Eurobond in 12 months, central bank Governor Benno Ndulu said in an interview. The government has appointed Citigroup Inc. (C) as an adviser, which told the country it should issue at least $500 million, he said.

Bloomberg
01 June 2012

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