Summer in the Field: Bond, Eurobond: Tracking African Eurobonds Issued Between 2006-2021
In recent years, Eurobonds have seen a spike in activity in Africa. These international bonds, typically issues in euros or dollars, offer countries an alternative funding source from foreign aid and multilateral institutions.
With the exception of South Africa and the Seychelles, most Sub-Saharan African (SSA) countries had not issued sovereign bonds in international capital markets until 2007. As of July 2021 though, this financial instrument has become a $136 billion asset class, with 21 SSA countries now holding one or more outstanding Eurobonds.
The pandemic is so far not slowing demand, either. In 2021 alone, $11.8 billion worth of Eurobonds were issued by African sovereigns. While some of this $11.8 billion was issued by emerging market Egypt ($3.75 billion issuance), the majority of it was issued by frontier SSA economies like Kenya ($1 billion), Ghana ($3 billion), Benin (€1 billion), Senegal (€0.8 billion), Ivory Coast (€0.85 billion), and Cameroon (€0.7 billion).
More than just growing in quantity, this asset class has also started growing in the ‘type’ of Eurobonds issued. For example, the Eurobond issued by Ghana in March 2021 was a zero-coupon bond, meaning Ghana will not make interest payments, but is expected to pay the principle upon maturity. This bond, worth $3 billion, was the first of its structure to be sold to an African country. Chosen for its ability to free up cash in the short run, this bond was noted by Ghanaian authorities for planned repurchasing of domestic and international debt in an effort to increase fiscal space as the country prepares for pandemic and post-pandemic recovery.
As part of the Summer in the Field Fellowship program sponsored by the Boston University Global Development Policy Center, I created a detailed dataset tracking African sovereign bond issuances between 2006 and 2021. The goal of this dataset is to track all the Eurobonds that have been issued by African sovereigns and collect certain variables that pertain to this asset class. Both the relative newness and rapid growth of Eurobond issues as a source of financing for African sovereigns made this an area ripe for research and data analysis.
Data Collection and Variables
Overall, the majority of the data available on this topic is often scattered across multiple datasets and fails to account for changes that have taken place in the past three years (mostly stopping at bonds issued before 2017). Additionally, and arguably most importantly, there is no accounting for the variation in demand (over- or under-subscription) for these bonds.
In the dataset, I tracked identifying variables such as coupon type, coupon rate, tenor and issue volume. These variables are often highlighted in studies on bond issues; for example, Olasbisi and Stein look at rates attached to bonds issued by African sovereigns and compare them to similar economies outside of the continent to determine if SSA countries are paying a premium for issuing bonds. The variable tenor is also often highlighted by scholars in this space, specifically as one of many indicators of growing investor confidence in the sovereign issues of some countries. For instance, in 2020 Ghana issued its first 40-year bond— a bond that was at the time SSA’s longest ever Eurobond. Noting that the average tenor of bonds issued by African sovereigns so far is about ten years, this issue indicated notable and growing investor confidence in Ghana specifically, but also SSA in general.
Another area of interest is the relationship between development and capital market participation. In the dataset, debt service to GDP ratio in the year of issue for each bond is tracked, as is the GDP growth rate at issue, the currency of issue, the rating given to the sovereign at time of issue and whether or not the bond was repaid, tendered or outstanding when the dataset was created. Understanding the debt-to-GDP ratio at time of issue will be key in any analysis of capital market participation and debt sustainability in SSA. Similarly, tracking the credit ratings of African sovereign issuers, alongside the coupon rate attached to their issues— will facilitate engaging with other bond studies and analyzing whether African countries are offered the same coupon rates as comparable economies with similar ratings.
The most interesting variable tracked was oversubscription. An oversubscribed issue is one whose demand is greater than the offer put forth by an issuer. For example, Ghana’s above mentioned 40-year Eurobond was for $3 billion dollars. The issue was almost five times oversubscribed, with bids reaching $14 billion dollars. Determining oversubscription offers researchers a better understanding of what drives the variation in demand for these Eurobonds. Future research questions might explore whether all or most SSA bonds are oversubscribed? Additionally, are the bonds of specific countries often oversubscribed and are the bonds issued at a particular time the ones that are oversubscribed?
What would also be interesting to observe are the reactions SSA countries have to oversubscription. When a bond is oversubscribed, the issuer has the option to increase the issue volume and to negotiate a decrease in the coupon rate, among many other options. What percentage of issuers actually do increase their issue volumes, and by how much? What percentage of issuers are able to negotiate lower coupon rates in response to their bonds being oversubscribed? This and similar questions are at the heart of the conversation on SSA’s engagement with capital markets.
Overall, the effects of SSA countries’ participation in capital markets remains to be seen, but more comprehensive data is necessary to gain a better understanding of this phenomenon.
Pamela Icyeza is Ph.D. Candidate in Political Science at Boston University and a 2021 Summer in the Field Fellow. Learn more about the Summer in the Field Fellowship.