African governments may curtail foreign-currency bond sales in coming months amid expectation that U.S. policy tightening will make it more expensive to pay back those debts, African Development Bank President Akinwumi Adesina said.
“Right now there is a little bit of caginess with regard to issuing dollar bonds or Eurobonds because the Fed rates are going up, which means it’s becoming a race to the top of the yield curve,” Adesina said Wednesday in an interview at the Conference of Montreal in Canada. “There is a bit of cautiousness now because the interest rate is very high. So there’s not a lot of excitement to issue bonds right now.”
While African nations sold a record $16 billion in Eurobonds in 2014, according to Johannesburg-based Rand Merchant Bank, sovereign debt issuance has been slow this year as an increase in U.S. interest rates pushed up yields and the continent struggles with lower commodity prices and weakening currencies.
South Africa sold $1.25 billion of ten-year notes in April and Ghana plans to raise as much as $1 billion in a Eurobond sale in July or September.
The AfDB estimates that $12 billion of Eurobonds were sold by African nations last year, compared with about $26.5 billion between 2006 and 2014, Adesina said. Average yields on sub-Saharan sovereign dollar bonds are 7.5 percent, more than 200 basis points higher than two years ago, according to data compiled by Bloomberg.
By comparison, average yields on emerging-market dollar debt have climbed 30 basis points to 4.9 percent in that period.
Rather than issuing bonds on foreign markets, African governments could turn to sovereign wealth funds and pension funds to raise capital for power and transport infrastructure, Adesina said. Pension funds on the continent have more than $330 billion to invest he said.
“I personally think the African countries will look a lot to the domestic market to mobilize the huge amount of capital that is there,” he said. “What is needed is to have better regulations so that the pension funds can invest in asset classes such as infrastructure and so on.”
The AfDB estimates sub-Saharan Africa needs investment of at least $93 billion a year over a decade to plug the gap in infrastructure.
Adesina disputed the notion that Africa is sliding back into a debt crisis, saying “I don’t think Africa is in a debt crisis at all, However it’s something to watch, and we are keeping our eye on that because of the Eurobonds being issued. But the African economy is still growing.”