Slump in commodities hits bond markets in Sub-Saharan Africa

In the last two years, we have seen large amounts of sovereign Eurobond issuances in the Sub-Saharan African region, reaching a record of more than USD 8 billion in 2015. However, this situation changed dramatically in the first half of this year.

After years of booming economic growth due to ample liquidity and strong external demand, particularly from China, the decline in commodity prices seen since mid-2014 has clouded the outlook for most of Sub-Saharan Africa’s economies. Low raw material prices and the anticipation of an interest rate hike by the Federal Reserve, coupled with weaker dynamics worldwide and domestic vulnerabilities, have resulted in large fiscal deficits, instability in the FX and financial markets, worsening current accounts and, finally, slow growth. This situation has had a negative impact on bond yields and international investors’ appetite for emerging market assets.

Some analysts are concerned that the debt these countries are carrying may not be sustainable. This is particularly the case in countries, such as Ghana, which are feeling the brunt of this coupled with weak currencies and slower growth. Regional governments’ finances certainly deteriorated in 2014 and our panel of analysts foresees fiscal imbalances worsening this year. In fact, FocusEconomics panelists see the region’s fiscal deficit widening from 2.9% of GDP in 2014 to 3.8% of GDP in 2015. Public debt follows suit and it is expected to rise from the 29.5% of GDP recorded in 2014 to 31.6% of GDP this year.

Ghana is the most vulnerable country in Sub-Saharan Africa as the country has large twin deficits (in the fiscal budget and in the current account) and a ballooning public debt that is more than double the regional average. Moreover, Ghana is suffering from high inflation and slow economic growth. Against this backdrop, the government, in cooperation with the IMF, is trying to reign in public spending and push ahead structural reforms. In this regard, the government is expected to sell USD 1.5 billion in Eurobonds in September, which will allow for assessing whether recent improvements in the fiscal balance that the IMF praised recently and the initiatives Ghanaian authorities have taken to stabilize the economy are helping to ease economic fears.

The financial situation is still manageable as most of the governments in the region improved their fiscal positions in years prior in the wake of the commodity price boom. Moreover, low rates in advanced economies and still ample liquidity are likely to support a rise in Eurobond issues in the months ahead. Nevertheless, a prolonged situation of low commodity prices and rising uncertainty about the state of the Chinese economy could further hit the economies in the region and diminish appetite for African bonds.

Written by: Ricard Torné, Senior Economist

Author: Ricard Torné, Head of Economic Research

Date: August 31, 2015


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