African nations urged to be cautious on refinancing of bonds

Out-Law News | 25 Sep 2014 | 4:25 pm | 1 min. read

African nations that utilise demand from bond investors may find the refinancing of their Eurobonds costly, the World Bank’s chief economist for the continent has said.

Francisco Ferreira told Bloomberg that while Eurobonds “seem easy to get in the first place, they can be quite expensive later on” when governments may need to refinance the debt.

Ferreira said that countries wanting to roll over loans when they mature may find that rates “rise sharply”. He said: “If when the negotiations come up and the country is in crisis the interest rate shoots up. They are relatively high risk unless you are able to guarantee that you don’t need that financing when they come to maturity.”

The governor of the Bank of Uganda Emmanuel Mutebile said earlier this year that the country would stay out of the sovereign bond market for the time being. “We should not be complacent about the dangers of big projects built on sovereign debt,” he said.

Last May, Fitch Ratings said a decision by Kenya’s government to extend the term of a maturing syndicated loan “highlighted the refinancing risk that some African countries face as they take on increased amounts of non-concessional market debt”.

Fitch said previously “debut Eurobonds for some African issuers are equivalent to a significant proportion of their international reserves, with the median for new African issuers at 25%, and in some cases much more”.

“If a Eurobond were to mature at a time when market access were denied, then an issuer might have no alternative but to pay the bond out of possibly limited reserves,” Fitch said.

A new phase of the multi-donor Debt Management Facility, DMF II, launched this year, marked a new partnership between the World Bank and the International Monetary Fund (IMF). A number of African countries are eligible for DMF II funding (1-page / 83 KB PDF).

Abha Prasad, a senior debt specialist at the World Bank, which manages the trust fund, said the World Bank’s partnership with the IMF, through DMF II, would expand the programme and offer new services

Prasad said: “The sovereign debt world can be complex, and the World Bank realised that low-income countries could improve their chances of staying on track with training on how to assess risks, better negotiate loan terms, and recognise the risks of borrowing from non-traditional creditors.”

According to the IMF’s Regional Economic Outlook for sub-Saharan Africa (117-page / 2.59 MB PDF), released in May 2013, access to capital markets in the region has grown significantly in recent years, “facilitated by easy global financial conditions”.

The IMF said: “By the end of March 2013, a diverse array of 11 countries in the region had issued international sovereign bonds, for reasons that include infrastructure building, benchmarking and debt restructuring.”