Hidden Risks To SSA Eurobonds
BMI View: We hold a negative view on SSA eurobonds in general, believing that rising yields in developed states will reduce the relative attractiveness of frontier markets. In this article, we highlight hidden macroeconomic risks which could affect trading for Ghana, Rwanda, Congo-Brazzaville and Gabon.
BMI has held a cautious view on emerging market debt since May 2013, believing that a pick-up in the US economy would prompt an end to quantitative easing, resulting in tightening liquidity and a rise in US treasury yields which would in turn cause investors to demand higher yields on risky frontier plays. Our view has been vindicated by the recent break of US 10-year treasuries through the key 2.70% support level, and as we have highlighted previously, Sub-Saharan African (SSA) eurobonds have been generally selling off since April. As yields in developed markets rise, investors are reassessing whether it still makes sense to hold SSA eurobonds at abnormally low yields. Gabon US$2017, for example, yielded just 3.0% in May 2013; the yield has since risen to 4.9% as of August 29.
We expect SSA eurobonds yields to edge higher over the coming 12 months and hold a particularly bearish view on Ghana US$2017 given risks to the budget balance and debt levels, as outlined below. In this article, we also highlight hidden risks to the eurobonds of Rwanda, Congo-Brazzaville and Gabon, which may cause the respective instruments to sell-off more quickly than others, as investors begin to price in these risks.
|Searching For (Relative) Value|
|Africa - X Axis: BMI Sovereign Risk Ratings (0-100), Y Axis: Spread Over UST (bps), Risk/Reward Frontier|