The southern continent’s risk build-up is underlined by falling scores for South Africa and Zimbabwe, but many other African bond issuers have resisted the downturn.
The improvement seen in Africa’s risk profile since December came to halt during the second quarter. While this might have been expected given recent concerns about China, which subsumes the greater share of the continent’s commodities, in reality it appears to have been mostly due to other specific concerns, including the re-emergence of political and economic instability ahead of Zimbabwe’s stalled elections, which has seen many of its indicators sharply downgraded.
Re-adjusted scores for high-risk Chad and Burundi have also been a prominent feature, alongside the more noteworthy deterioration in risk for South Africa, which has again failed to impress risk experts this year, shedding almost a point and now lying just a 10th of a point above Botswana in the rankings.
The country’s labour strife, caused by tensions between the mineworkers’ unions, and in turn between the unions and government, remains a concern for risk experts, alongside potential currency volatility and policy execution problems linked to the downgraded scores for institutional risk and the regulatory/policy environment.
The vast majority of bond issuers – among them Kenya, Namibia, Nigeria and Tanzania – had until very recently seen a large improvement in their scores. Those improvements have been curtailed since March on signs of slowing demand in China affecting commodity prices and in light of the widespread emerging markets risk aversion.
As to the effects of this, ECR expert Samir Gadio, emerging markets strategist (Africa) for Standard Bank, says: “African sovereigns will have to pay higher external funding costs. It doesn’t necessarily mean they won’t come to the market, but some of them will have to think twice.
“We had a period of very low yields in 2012 and early 2013 because of the substantially loose monetary policy stance across the globe and by the US Federal Reserve. But now expectations are shifting.
“The rally was so over-extended on the back of that liquidity that some investors have realized all of a sudden they have tight evaluations on their books, and if the Fed starts to tamper with quantitative easing, this probably guarantees that US treasury yields will go up and that Eurobond yields on average will still increase.”
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