Market Intelligence

Late comers to Eurobond markets could pay higher yields on Fed’s rate hike

by Endurance Okafor

February 19, 2018 | 12:45 am
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African countries with the intention to issue Euro bond may have to hasten up in their issuance as there is prospect that the U.S Federal Reserve (Fed) hike could lead to rise to risk of default.

This is because higher United States (U.S) interest rates could make these debts more difficult to service.

Rising US inflation which printed above market expectations in January is driving increased prospects of more than three interest rate hikes by the US Federal Reserve in 2018.

The Cleveland Federal Reserve Bank President Loretta Mester said in a statement that the U.S. Federal Reserve will raise interest rates three to four times in both 2018 and 2019.

Rising US interest rates have three main impacts on emerging markets (Africa) – higher domestic currency value of debt, higher cost of refinancing and lower commodity prices.

A higher currency value of debt is a result of the tendency of emerging markets to issue dollar-denominated debt. Investors usually lack faith in the stability of emerging market currencies and are more likely to invest if they are repaid in dollars, which translates to lower yield of dollar-denominated debt.

Rising interest rates are usually bearish for emerging markets and these results in increased borrowing costs and larger debt repayments for governments.
However, all emerging markets cannot be considered altogether as the impact of rate hikes varies substantially to reflect the different levels of dollar-denominated debt, reliance on commodities and growth prospects.

Higher interest rates in the US traditionally lead to the dollar appreciating, which would make it harder for governments to repay these dollar-denominated debts.

Refinancing costs also increase not only because the dollar has increased in value, but also due to investors expecting the yield provided by risky emerging market debt to increase in order to maintain their spread with risk-free US treasuries.

Commodity prices decrease as (although they have idiosyncratic characteristics), they are all usually traded in dollars and therefore, demand tends to decrease when the dollar strengthens as commodities become more expensive in other non-dollar currencies.

Most African countries like Egypt, South Africa and Nigeria has in recent times gone on road shows to tap into the Euro bond market hoping it will not be affected by a high U.S borrowing costs as the terms of the coupon had been agreed upon.

Nigeria is first on the list of Africa countries that have auctioned and still have plans to issue Euro bond in the nearest future. Africa’s largest economy issued a $3 billion Eurobond sale in November 2017, out of which $2.5 billion went to funding the 2017 budget, and $500 million to refinancing local debt.

The issuance will complete a dollar-debt program that started with selling $3 billion of Eurobonds in November. Analysts have noted that the yield on the current bond looks a bit pricy and may have factored pre-election jitters.

South Africa was also among the African countries that issued bond in 2017 as it auctioned a pair of dollar bonds in overseas capital markets worth $2.5 billion to help finance its foreign currency commitments in September of last year.

Egypt has also join in the trend as it raised $4 billion in a dollar-denominated Eurobond sale that closed late on Tuesday, 13 February, as part of a drive to plug its budget deficit and boost dollar holdings as it pursues an IMF-backed reform programme.


Endurance Okafor

by Endurance Okafor

February 19, 2018 | 12:45 am
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