(Bloomberg) — An effort by government agencies and large global banks to reduce borrowing costs for African countries has received a boost from a new index that helps investors assess relevant bond prices, executives and officials involved said.
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The iBoxx LSF USD African Sovereigns Index, launched in late-June, tracks performance of African sovereign Eurobonds that a broader program called the Liquidity Sustainability Facility accepts as collateral. The LSF’s aim is to enhance the short-term financing market in Africa, which is badly underdeveloped, by offering more transparency with daily pricing.
African sovereign debt offers yields as much as 2.6 times higher than similarly rated countries on other continents, according to data compiled by Bloomberg. By developing a deeper repo market, the LSF estimates that African countries could save $11 billion over five years.
“This new index will help investors benchmark the true risks and rewards from investing in a diversified portfolio of African hard-currency sovereign debt,” said British Robinson, coordinator at Prosper Africa, a US presidential initiative aimed at encouraging trade and investment in Africa.
Gergely Urmossy, an emerging-market strategist at Societe Generale, said initiatives like the LSF can help reduce risk premia if they create new liquidity. But to attract more investors, African sovereigns need to improve their fundamental creditworthiness.
African countries saw 15 credit rating downgrades and only four upgrades, according to reinsurance group Chaucer. That bucked a global trend of net upgrades last year. The increase in global interest rates, heavy debt burdens and volatile currencies strained the finances of African nations and their ability to repay debt.
“The asset class or any idiosyncratic story’s attractiveness will depend on whether the potential investor base will find opportunities with attractive risk/reward profiles,” Urmossy said. Measures to improve liquidity won’t be “game-changers without the right macro setting or policies,” he said.
Established at the UN Climate Change Conference in 2021 and run by Vera Songwe, the former executive secretary of the United Nations Economic Commission for Africa, the LSF has become a linchpin for improving a sovereign-debt market that has had trouble luring a wide range of investors. African leaders have long complained that perception issues make it more difficult and expensive for their countries to borrow than peers with similar debt ratings elsewhere.
LSF’s prominent backers and advisers — from the White House to the World Bank and large institutions such as Citigroup Inc. — have helped the initiative funnel more liquidity through Africa’s financial pipes in what are called triparty repo transactions. Structured as short-term loans, a bondholder sells the instrument to a counterparty with an agreement to repurchase it soon after at a slightly higher price. A third party stands in the middle to hold collateral and ensure payments go through properly.
Higher Credit Costs
Those overnight loans are crucial to the functioning of capital markets in developed economies, but they have been very limited in Africa, which, in turn, forces sovereign borrowers to pay higher credit costs. It is too early to draw conclusions about the success of the iBoxx index, which launched on June 28, but it has created enthusiasm among those who want to improve conditions.
“Africa, particularly in the hard-currency bond market, didn’t have any real way to directly support a repo market,” said David Escoffier, chief executive officer of the LSF Secretariat. “The aim is to enlarge the universe of potential investors.”
The LSF receives funding from multilateral development banks including the African Export-Import Bank, and counts large institutions as partners. Citigroup advises the LSF and participated in its inaugural $100 million transaction in 2022. The LSF works with the triparty platform of Bank of New York Mellon.
S&P Dow Jones Indices manages and owns the newly launched iBoxx index. The gauge is now tracking bonds from 14 countries out of 19 issuers that are eligible for inclusion. Among them are Benin, Ivory Coast, Nigeria, South Africa and Morocco. Those involved expect the index to spur exchange-traded funds based on the its price — and to ultimately lower funding costs for African nations. When enough issuances have taken place the LSF plans to set up a similar index for African green, social and sustainable bonds.
Debt sales in Africa this year demonstrate a growing appetite for riskier bonds amid prospects of interest-rate cuts in the US.
Kenya, rated five levels below investment grade by S&P Global Ratings, received orders for more than three times its $1.5 billion issuance in February, before its recent budget debacle. Similarly, Benin’s dollar bonds were oversubscribed by more than six times and Senegal was able to raise $250 million more than expected in a June Eurobond offering. However, this increased interest hasn’t yet lowered the cost of borrowing.
For Escoffier, who spent 25 years in London and New York as CEO of Newedge Group SA and deputy head of global markets for Societe Generale SA, the goal “is to make more African countries eligible and able to access the market.”
–With assistance from Lauren Tara LaCapra.
(Updates with credit-rating trends in second paragraph below first graphic. An earlier version of this story corrected the link between the LSF and BNY Mellon.)
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