WASHINGTON, DC – Over the last decade, Africa’s governments have increasingly come to rely on Eurobonds to finance their budgetary priorities. Issuance of these securities – which are denominated in foreign currencies – soared in the wake of the global financial crisis, as many Sub-Saharan countries tapped the international bond market for the first time. The opportunity that Eurobonds imply for ensuring adequate funding for development efforts in Africa is immense, but this potential can be realized only if their use is carefully managed.
Several factors have contributed to the popularity of African Eurobonds. On the supply side, many countries are benefiting from a more favorable macroeconomic environment. Debt-relief initiatives have left governments with healthier balance sheets. The dire need for infrastructure investment, the shallowness of domestic financial markets, and the scarcity of donor aid have all contributed to governments' recourse to alternative debt instruments.
On the demand side, the well-publicized narrative of Africa's economic rise – with strong and sustained growth underpinned by young populations – has whetted investors’ appetite for the continent’s debt. Meanwhile, in many developed countries, quantitative easing and unconventional monetary policies have pushed down interest rates, making frontiers with high returns, such as Africa, more attractive.
As a result, demand for African sovereign debt has been rising steadily, and many recent issuances have been oversubscribed. When Côte d’Ivoire issued $1 billion in Eurobonds in February, demand outstripped supply by a factor of four. The same was true for Nigeria’s $1 billion offering last July and Kenya’s $2 billion debut in the bond market last November. Issuance conditions were also favorable, with yields averaging 5%.