Is Sub-Saharan Africa’s Credit Crunch Really Over?

After an almost two-year lull, sub-Saharan African issuers are clawing their way back into international markets. In close succession, Côte d’Ivoire, Benin, and Kenya issued $4.85 billion worth of Eurobonds in the first quarter of 2024. The bond offerings were as much as six times oversubscribed, in a sign that investor demand for riskier frontier market debt is back.

Still financing conditions remain rough: Borrowing costs are high and the three issuers—Côte d’Ivoire, Benin, and Kenya—are paying an average coupon of 8.5 percent. This adds up to much as $4 billion in interest over the next 14 years. Most of the borrowed funds will be used to refinance existing (and cheaper) debt that is coming due or plug budget deficits—rather than for new investment programs—which raises questions around the long-term financial viability of borrowing at such high rates. With a barrage of Eurobond repayments coming due over the next several years, frontier sub-Saharan African issuers may have little choice but to borrow at high rates merely to stay afloat.

The big picture: declining net flows

Over the past decade, frontier economies across sub-Saharan Africa have experienced significant swings in external financing.^[1]The 2010s were dominated by two developments: the emergence of China as a dominant source of finance through its Belt and Road Initiative, and the move by frontier sub-Saharan African governments to tap international capital markets. Prior to 2006, no sub-Saharan African country other than South Africa had issued an international foreign currency bond. By 2021, fifteen countries in the region had issued at least one Eurobond.

The financing picture for the region began to shift again in 2019. Net flows—i.e., new money minus repayments—began to decline. According to the World Bank’s latest IDS data, net flows peaked in 2017 at more than $42 billion, and had declined to $21 billion by 2022.^[2] These headlines numbers are likely a significant underestimate of the magnitude of the shift since Chinese bilateral flows tend to be underreported (although the drop in the “banks and other private” in the chart likely captures some of the pullback by state-affiliated Chinese corporations). Meanwhile, lending from multilaterals—especially the World concessional arm IDA, or the International Development Association—helped offset the decline with a near 50 percent increase in net funding to the region between 2018 and 2022. 

With the onset of the COVID-19 pandemic, sub-Saharan countries lost market access for the remainder of 2020. This was largely due to the redrawing of global investor risk appetite towards safer positions and rising concerns about mounting debt levels across the continent. But in 2021, investors were back on the hunt for yield and six countries in sub-Saharan Africa raised over $11 billion through Eurobonds. But demand then fell sharply when the US Federal Reserve began hiking interest rates in March 2022, which effectively shut sub-Saharan African frontier issues out of capital markets once again. Sub-Saharan African issuers remained excluded from the market throughout 2023. 

2024: Start of a new cycle?

The lack of market access presents a significant risk for countries with debt payments coming due. Eurobonds typically tend to have “bullet” maturities, meaning all principal is repaid at the end of the loan. This can pose rollover risk for the borrower. Several sub-Saharan African frontier market issuers have Eurobonds coming due this year, including Kenya ($2 billion) and Côte d’Ivoire ($750 million). (Ethiopia has already defaulted on its Eurobond.) In 2025, Côte d’Ivoire, Nigeria, and Cameroon each have a bullet payment coming due.  

It is against this backdrop, of repayments coming due on Eurobonds—and increasing likelihood of rate cuts on the horizon in the United States—that a handful of African issuers are returning to the market:

• At the end of January, Côte d’Ivoire broke the ice and issued two simultaneous Eurobonds worth a combined $2.6 billion: a 9-year sustainable bond and a conventional 13-year Eurobond. The government plans to use the Eurobond proceeds to rollover and repurchase several Eurobonds and foreign currency bank loans. The proceeds from the sustainable bond will finance expenditures defined in its new sustainable framework.

• Two weeks later, in early February, Benin made its debut dollar bond offering and issued a $750 million 14-year Eurobond. The proceeds will be used to finance the country’s 2024 budget.

• On the heels of its IMF loan, Kenya issued a $1.5 billion 7-year Eurobond in mid-February to help repurchase an existing $2 billion Eurobond that will come due in June.

These bond auctions were oversubscribed by as much as six times, showing that investor risk appetite is shifting back towards frontier emerging markets. But those investors are demanding a hefty premium to purchase the debt: the coupon rates for these newly issued bonds are as much as 200-300 basis points higher than the older debt countries are repaying. Kenya in particular is paying a dauntingly high rate (9.75 percent) to demonstrate to markets that it will be able to rollover its 2024 Eurobond.

The long-term sustainability of these market transactions will largely be determined by how the external global environment shapes up. If inflation keeps coming down in the U.S. and elsewhere and the Federal Reserve moves to lower interest rates, financing conditions for riskier markets could become more benign, enabling countries to reprofile their more expensive debt. But sub-Saharan African issuers remain extremely vulnerable to the vagaries of global economic sentiment. Both Nigeria and Cameron have Eurobonds coming due next year which are currently not trading at a discount, in a positive sign that investors are sanguine that they will be repaid.

It's easy to look at African countries’ return to the markets and cheer, and it’s unambiguously positive that frontier economies can expand and diversify their financing sources. But it’s too early to declare victory; the fact that governments are accepting these high rates is a sign that the credit crunch endures.

Over the near few years, sub-Saharan African countries may increasingly find themselves between a rock and a hard place. Other sources of funds are on the decline, with lessened ambition from China’s Belt and Road and a potential slowdown in World Bank financing should the upcoming IDA replenishment fail to reach a good outcome. The region has almost $55 billion a year coming due to external creditors over the next three years, to say nothing of the yawning development financing gap. Benin, Côte d’Ivoire, and Kenya show that countries are willing to accept steep terms to get the financing they need—but also highlight the risks of leaving the region to sink or swim in a ruthless global financing environment.