Africa’s local currency debt capital markets are seeing a surge in activity

12 August 2020 Kwasi Kwarteng, Head of Debt Capital Markets for Africa Regions at Standard Bank Group
Kwasi Kwarteng, Head of Debt Capital Markets for Africa Regions at Standard Bank Group

Kwasi Kwarteng, Head of Debt Capital Markets for Africa Regions at Standard Bank Group

As a result of the economic downturn brought on by the COVID-19 pandemic, global primary debt capital market activity for sub-Saharan Africa has been subdued.

In contrast, the local currency debt capital markets for certain African countries have proven resilient, with a notable surge in activity over the first half of 2020 due in part to the low interest rate environments in these key markets.

Many corporates and governments have taken note and are capitalising on this shift.

While it is too early to draw conclusions, we believe this surge in activity could help Africa’s local currency debt capital markets build scale and ultimately attain a level of maturity needed for issuers to reliably depend on these markets to meet their funding needs.

Also, with murmurs about African governments seeking a reprieve on hard currency debt obligations – debt denominated in US Dollars and Euro – mainly to ease capacity for COVID-19-related initiatives, we believe hard currency bond issuers will remain largely opportunistic, targeting the most ideal issuance windows to access the market as observers await clarity on debt-relief negotiations.

As a result, in 2020, West Africa has led the way, with a local currency debt capital market that has grown in stature and provided a clear and compelling funding alternative for market participants.

Particularly in Nigeria, corporate issuers and the Sovereign are taking advantage of unprecedented low interest rates to issue both short- and long-dated instruments. Stanbic IBTC Bank’s debt capital markets team has arranged Naira-denominated issuances for eleven corporates and financial institutions since February – a significant jump compared to the same period last year. Signals from the monetary authorities indicate that market conditions could remain unchanged in the near term, with the most recent monetary policy rate adjusted by 100 basis points, from 13.5% to 12.5%.

In Ghana, where the policy rate was reduced by 150 basis points earlier in the year, Stanbic Bank has arranged nine longer-dated Cedi-denominated bond transactions for the Sovereign this year. Additionally, there is a healthy pipeline of non-government issuers, particularly in the financial sector, seeking to capitalise on the increase in liquidity and growing interest in bonds and commercial paper.

Meanwhile, in East Africa, there has been an uptick in interest in local-currency issuances following a relatively quiet three years. Green bonds are in focus after property developer Acorn Group issued green bonds in late 2019 and in April 2020. Stanbic Bank Kenya served as sole arranger for both transactions. In Tanzania and Rwanda, Standard Bank has been occupied with arranging ground-breaking transactions which we aim to complete during the second half of this year.

There is renewed activity in Southern Africa as well, including in Botswana, where Stanbic Bank will assist two issuers in accessing the Pula markets this year. Meanwhile, eSwatini has an uncharacteristic healthy pipeline, and there has been a milestone achievement in Mozambique, where Standard Bank arranged the only listed non-government Meticais transaction in 2020 so far.

The increased interest in local currency debt capital markets is not one-sided – in other words, not only issuer-driven. Pension fund reforms in certain countries have enhanced pension fund activity, with local pension funds and real money managers compelled to seek quality opportunities to park liquidity. There is also international investor appetite for certain local currency bonds, particularly in markets with more amenable exchange controls, although local institutions are leading demand at this point.

With all these advantages, challenges remain. For instance, though green bonds have been a clear success story in East Africa, East African investors remain skittish as certain investors continue to struggle to convince stakeholders about the reliability of the debt capital markets, following defaults by several corporate issuers over the past three years.

According to the Institute of International Finance, over the 10-year period ending 2019, debt levels in sub-Saharan countries – excluding South Africa – rose 23 percentage points to about 50% of the region’s GDP. This was largely fomented by an increase in hard currency denominated bond issuances. But with local currency markets having now proved that they are adaptable to scale, a less expensive source of funding for addressing local business needs, and easier to access, we believe local-currency bonds and commercial paper will be a significant component of the region’s debt profile over the next 10 years.

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