Eurobonds To Adjust To Shifts In Sovereign Risk
There are two notable trends in SSA sovereign risk which we believe have yet to filter through to eurobond trading: the deterioration in Zambia's fiscal balance and the stagnation in Gabon's oil sector.
In Zambia's case, the USD2022 global bond has shown relatively little reaction to the revelation in October 2013 that the budget deficit was around twice the size of what it was previously thought to be. Finance Minister Alexander Chikwanda estimated that the 2013 deficit would be 8.5% of GDP, rather than the 4.5% previously targeted. The performance of Zambia USD2022 can be contrasted with that of Ghana USD2017, where escalating concerns over fiscal stability have caused the bond yield to rise by over 150 basis points since the beginning of 2014. Although the new Zambian 10-year bond (USD2024) issued on April 7 2014 had a yield significantly higher than the previous 10-year bond (USD2022) issued in September 2012 (8.625% vs 5.342%), this was mainly due to the broad-based increase in bond yields globally over the interim.
As regards Gabon's USD2017 bond, we believe that investors are not fully pricing in the macroeconomic risks. Although Gabon benefits from surpluses on both the current account and fiscal account (a rarity in Sub-Saharan Africa), the country will face serious long-term economic challenges as the critical oil sector declines, notwithstanding the drive towards economic diversification. We forecast that Gabon will be running both fiscal and current account deficits by 2017. We feel intuitively that the 3.8% yield offered on the USD2017 bond is insufficient reward for the inherent level of sovereign risk, even though the macroeconomic risks are long-term in nature. The 5.5% yield offered on the USD2023 bond is a better reflection of the risks, and we believe that the USD2017 yield will rise over the coming months.
|Zambia USD2022 Shows Little Reaction|
|Africa - Eurobond yields, rebased to October 2013 = 100|