The twists and turns of Mozambique’s debt saga have made headlines across the world and even appeared in that bastion of British public opinion, The Daily Mail. It has all the features of a great epic — hidden cash, battleships, shady deals — and still no conclusion at the time of print.
A lack of transparency that duped even the International Monetary Fund has left Mozambique in a pickle, leading some to suggest that the African sovereign has damaged not only its own ability to access the bond markets again, but also access for others. While Mozambique works to restructure a sovereign-guaranteed loan, holders of the country’s new sovereign bond are nervously watching the central bank's coffers empty ahead of the due date for their 2017 coupon payment.
At a recent African capital markets conference, one panellist said that the IMF was now paying extra attention to the entire debt sustainability framework and combing through balance sheets for fear that lots of countries were hiding this sort of debt. Surely a cautionary tale for our age? Apparently not.
African debt has rallied a lot in the last two weeks. In the case of Zambia, this was as much as eight points. Its 2027s were quoted at a cash price of 91 on Monday. Dollar debt from Angola and Ghana was 20bp-30bp tighter in spread terms last week.
While most investors are identifying Mozambique as an outlier or a basket case and piling their money next door into Zambia, even Mozambique has its fans. “You can play that,” said one EM investor at the conference when Mozambique’s bonds touched 70 in cash terms.
Just days after the UK voted to leave the European Union, analysts pointed to Africa as a place to “hide out from the rest of the carnage” and one week after the vote, sub-Saharan African credit was trading back through pre-Brexit levels. Traders are still reporting that investors can’t get enough of the region, as well as Tunisia and Morocco in North Africa.
But the rush on Africa is likely to have more to do with the low rate environment elsewhere than the strength of African credit itself.
EM bankers have been quick to claim a “safe haven” status for their market but note that yield hunters have turned up in droves for a pick-up over Europe’s $12trn of assets yielding sub-zero. Fund flows into EM bounced back to $16.7bn in June, after near-zero inflows in May, according to IIF data.
Several African sovereigns are understood to be looking at the market and are likely to be met with a strong reception. Market consensus now puts a US Federal Reserve rate hike much later in the year, meaning that borrowing costs will stay lower for longer. Angola, Kenya, Ghana, Nigeria, Tunisia and Morocco have all been discussing debt raising and would likely find pricing to their liking, were they to access the market now.
While increasing foreign investment in Africa is in many respects a positive for the country, both the region and investors stand to be hurt should an unforeseen event trigger outflows. Earlier this year, commodity related concerns saw Ghana and Zambia’s yields shoot north of 15%.
For now though, the market is showing its resilience and investors are standing firm even as Mozambique continues to grab headlines. Sovereign borrowers would be advised to lock in lower coupons before one too many defaults, or a US rate rise, see the region fall out of favour.