Africa Weekly Review: Debt issuance across the continent and the prospects of Ghana and Gabon in a weak commodity price environment.

Debt issuance: Investor demand shrinking

The impact of the global market turmoil on debt issuance in Africa has been predictable: the flow of new deals is greatly reduced. The mandate chasers and syndication desks of the large international investment banks are short of work. Those desks have differing views as to when the pipeline will again gush new deals in the region, but few see a pick-up before late 2009. No new Eurobonds are likely in the present market conditions.

New fixed-income transactions over the next 12 months or so will be fewer, smaller, mostly denominated in local currency, and distributed within the local and sub-regional investor base. A recent issue by a Kenyan steel manufacturer of the local equivalent of US$25 million meets these criteria.

Asset-backed securities in demand

Self-liquidating bonds with access to secure cash flows will be well-received: commodity exporters and mobile telephone companies are likely issuers in this category. With the shrinking of the appetite for deals by traditional investors (banks and funds in G7 countries), there will be an increasing role for development finance institutions, which boast strong balance sheets and have a long-term investment horizon.

There will be some exceptions. Some governments such as Nigeria and Kenya may issue infrastructure bonds in their local markets because investments can no longer be deferred. Commodity producers which raise funds in foreign currency each year for export financing (such as Ghana’s Cocobod) will still come to the market. Supranationals may still diversify their funding programmes with small issues in exotic currencies, such as the European Investment Bank deal demominated in Zambian kwacha. Private placements may still be forthcoming from more opaque markets such as Angola.

Ghana and Gabon: Tale of two Eurobonds

In late 2007, when investor risk appetite for emerging markets was still huge, two West African sovereigns made their debut issues on international capital markets. Ghana launched a US $750 million bond in September as part of its celebration of 50 years of independence. Then in December Gabon raised US$1 billion in a refinancing of its external debt obligations.

Both bonds mature in 2017 and have bullet repayments. The coupons are similar: 8.5 per cent for Ghana and 8.25 per cent for Gabon. Ghana’s rating (B+) is one notch below Gabon’s (BB-). The similarity of the debt instruments makes life simple for strategists.

Ghana currently trades at about 62 cents, compared with 67 cents for Gabon. These are more than indicative prices since some trades are taking place. In our view Ghana is the stronger credit for several reasons, based on a view of the two countries’ prospects now that oil prices have turned. (This analysis is not intended as a recommendation of a specific relative value trade.)

Lessons learned by the region’s next oil producer

Gabon’s oil production, which averaged 230,000 barrels/day (bbl/d) in 2007, is in long-term decline. Meanwhile production from offshore discoveries in Ghana is set to begin in the first quarter of 2010 at 150,000 bbl/d, and to reach 350,000 bbl/d in mid-2011. (This is according to the information of the operator of the Jubilee field, Tullow Oil.)

Because Ghana is a late arrival in the club of oil producers in the Gulf of Guinea, it has been able to learn from the mistakes of others. It has taken technical advice from the government of Norway, and is determined to introduce the stabilising mechanisms now widely employed (such as Nigeria’s Excess Crude Account) to enhance fiscal management and generate savings, when crude prices allow, for the proverbial rainy day. Gabon has such a mechanism also (its Future Generations Fund), but the IMF has expressed concern about the transparency of its management.

Pre-election spending in Ghana

The current range of oil prices, as well as the profile of production, will favour Ghana. Its fiscal deficit reached 9.1 per cent of GDP in 2007 and accelerated to an estimated 12 per cent in the year to September 2008. Wage increases for public employees, fuel subsidies and spending initiatives to contain the costs of Ghana’s structural energy deficit have all contributed to this fiscal deterioration. In Ghana, as elsewhere, the electoral calendar has influenced government spending.

However, the fiscal position should start to improve in the months ahead. Ghana holds presidential and legislative elections on 7 Decemeber, and the government has begun to make progress in tackling energy shortages (which can be traced to historic underinvestment as well as low water levels in the Volta).

A history of fiscal underperformance in Gabon

Gabon’s public finances have been strong but are highly vulnerable to the tumbling oil price. It achieved a surplus equivalent to 7.8 per cent of GDP in 2007 and, on the basis of mid-year estimates, was forecast (by the IMF) to achieve 12.6 per cent in 2008. This forecast is clearly in need of revision. It is relevant to add that the Fund noted (at the time of its forecasts) that it was unable to carry out the second review under the Stand-By Arrangement of May 2007 because of fiscal underperformance.

None of this will surprise those in the fixed income world who have followed Gabon over the past decade or longer. Gabon issued its Eurobond at a time when the outlook for oil prices was strong, and when investor demand for paper from newer emerging markets was healthy. It had earlier prepaid some of its debt to official, bilateral creditors in the Paris Club and issued the bond to refinance the balance.

Now that the oil price outlook has worsened, we favour Ghana as a diversification play. Gabon has a population of less than 1.5 million, and is an upper middle income country in terms of revenue per head. It can develop its mining and forestry industries but on the whole there are few areas of the economy which could expand to compensate for the long-term decline of oil output. It does not have the opportunity available to a low-income country with a large population (such as Ghana) of pushing reforms to encourage substantial FDI, the return of the diaspora and the expansion of the domestic middle class. The Ghanaian government has had such an agenda since 2000, and the fruits of its reforms are clear: new FDI (such as cocoa processing), asset sales (such as telecoms and aluminium) and strong growth in remittances (visible in real estate and on the bourse).

The “Kenya effect” unlikely after Ghana’s elections

Our final point in our tale of two Eurobonds concerns the politics. We favour Gabon on the basis of its stability. It has had the same president for more than forty years: indeed Omar Bongo is the world’s longest serving elected head of state, and owes his survival to the use of his formidable interpersonal skills with the country’s small political class. He plans to stand for another seven-year term in 2012.

There is an element of political risk in Ghana where the elections are livelier and more strongly contested. We expect the ruling New Patriotic Party to triumph in both the presidential and legislative elections next month on the basis of its economic record over eight years. But in any case, its main challenger, the National Democratic Convention, does not have significantly different policies. Nor do we expect a destructive “Kenya effect” in the event of a close result at the polls.

Recent research reports:

Niger Delta: The political leadership needed to overcome deeply rooted problems is absent.
The administration in Abuja and the state and local governments have different agendas.

Nigeria Quarterly: The non-oil economy is robust despite falling crude prices.
Time for the presidency to show leadership and direction.

South Africa Quarterly: Policy continuity until the elections.
Strong public investment staves off recession.

With best regards,

Gregory Kronsten
Director, Africa Research
Trusted Sources