Yemisi Izuora
A number of factors have been identified as contributing to failing economic recovery of countries in Africa despite over subscribed Eurobond issuance in recent times.
Eurobonds are debt instruments issued by a country in a currency different from its own. Eurobonds have risen to prominence in Africa because they have opened a window for governments to diversify their funding sources from traditional concessionary loans offered by the International Monetary Fund (IMF) and foreign aid, both of which are declining.
In addition, multilateral loans were becoming unpopular because they set strict conditions about austerity which are designed for governments to reduce spending.
A bond functions as a loan in which an investor gives a borrowing entity an amount of money for a specific period of time in exchange for periodic interest payments. South Africa issued the first African bond in 1995.
Currently, 21 African countries including Nigeria, have issued Eurobonds worth a combined total of an estimated US$155 billion on international bond markets.
Nigeria also issued a US$1.7 billion Eurobond on 3 December 2024, which was oversubscribed 5.4 times.
Nigeria will pay an interest rate of 9.625 per cent per year on its bond with a duration of 6.5 years, and 10.375 per cent for its 10-year bond.
South Africa issued two international government bonds on 14 November 2024, amounting to US$3.5 billion.
One bond was valued at US$2 billion, with a coupon rate of 7.1 per cent.
The other was valued at US$1.5 billion with a coupon rate priced at 7.95 per cent.
The coupon rates reflect a fixed interest that the country in question will be paying bondholders semi-annually. These rates are high. They are set by bond issuing syndicates based on expected demand.
All African bonds issued to date have been oversubscribed by more than 2.5 times. A bond is oversubscribed if the bond seller receives more orders than the amount available for sale.
Coupon rates below 5 per cent would be reasonable to support such recurring expenditures. The rates are high, maybe even too high for South Africa and Nigeria to repay. Low repayment obligations would allow government to save resources for other developmental needs.
Nigeria and South Africa’s bonds are among many issued by African governments which have all been oversubscribed by at least 2.5 times over the past decade.
African governments celebrate oversubscription of bonds as a sign of strong investor confidence in African economies and high appetite to invest on the continent and it is portrayed as huge success.
However, experts say this is not the case.
The oversubscription of bonds is a situation when demand exceeds the amount of instruments that the issuing country intends to sell. It means that investors want to buy more bonds than are available.
When the demand for bonds exceeds supply, the coupon rate should come down, not go up. The oversubscription of bonds shows that the bond interest rates that are being set are too attractive to investors and could be reduced.
High interest rates are more favourable to investors, but they mean high repayment costs for the borrowing government.
Institutional investors from Europe and the US buy these instruments.
An expert on Africa sovereign debt, Misheck Mutize, in a recent article
explains why the system isn’t working in favour of African countries.
According to Mutize, African governments are failing to use the strong demand for their bonds strategically. They could instead bargain for more favourable terms:
- longer tenor – the period before the principal must be repaid. Africa should shift to issuing bonds over 30 or 40 years. This allows a country to invest proceeds into longer term projects.
- low coupon rates – a fixed amount that the government will pay to bondholders semi-annually until maturity of the bond. It should be less than 5% per annum.
Accepting high interest rates has cost Africa billions in debt servicing costs which is threatening the continent’s debt sustainability.
There is one reason why this is happening.
The uneven power balance between African governments and those managing the actual issuing of the bonds.
But, in Mutize’s view based on his sovereign debt management experience, governments could and should be smarter in their approach.
It would be better for the African bonds to be undersubscribed having been priced at their intrinsic value with favourable terms.
The only risk of undersubscription is negative market sentiment, which may affect future capital raising efforts.
Undersubscription happens if demand for the bond is less than supply. Potential investors might think there’s something risky about the issuer. But, with time, market jitters will flatten out.
Meanwhile, a report by CFG Advisory has shown that Nigeria Gross Domestic Product (GDP) at $195 billion has declined over the last decade losing over $300 billion in value due to devaluation, low productivity and stagflation.
The report titled, ‘Nigeria’s 2025 Economic Forecast from Reform Fatigue Quagmire to Sustainable Growth’ stated that the country is no longer the largest Economy in Africa, ranking fourth behind South Africa, Egypt and Algeria.
“This owing to prolonged policy inconsistency since the economy came out of post COVID-19 recession. The ongoing exercise to rebase GDP and CPI might therefore not yield the desired results,” the report explained.
The report chaired by Adetilewa Adebajo noted that Nigeria’s 18-month economic reform program has yielded mixed results, largely due to poor implementation and putting the cart before the horse.
“The program’s biggest impact on the economy has been the devaluation of the naira from about 450- N1700/US$.
“The cost push effect of fuel subsidy removal worsened the situation in an economy already in stagflation with sharp increases in inflation trajectory. This led to reduced household purchasing power and higher interest rates for the firms and the economy. The social intervention program has also not made any impact failing to provide succour.
“To exacerbate matters, government borrowing has exceeded the $100 billion mark and debt service costs doubling from N8 trillion in 2024 to N16.3 trillion in the 2025 proposed budget. N16.3 trillion in debt servicing is not sustainable as it exceeds the defence, security, infrastructure, education, and health budgets combined at N14 trillion.
“The gains from the subsidy removal are now being used for debt servicing, instead of investment in capital expenditure that can create stimulus for economic growth. Money supply has also increased by 50per cent YOY, to N108 trillion, a historic high that subverted the CBN’s ability to meet its 24per cent 2024-year end inflation target.”
On getting the economy back on track, he urged the government to reduce its debt burden, restore its credit rating to investment grade and tame inflation.
“This would reduce borrowing costs and provide stimulus for investment, sustainable growth, productivity, and employment.
“To accomplish this, FGN must restructure its capital structure and balance sheet. Selling down its JV oil assets will raise $30-50 billion, that can be applied to reduce the debt burden, improve the foreign exchange regime, provide dollar supply for naira appreciation, restore credit rating and boost net reserves.”
The report projected another year of high interest rates with inflation trajectory downwards to about 22per cent by year end, with effective rate cuts to sub 20per cent by Q1 2026.
“The Naira position could be sub-1000/$ or north of 2000/$ depending on how government manages its debt profile, boost oil production and asset sales.
“The oil and gas sector GDP grew by 10.2per cent with only US$3 Billion investments in 2024. Investment levels of $22 billion recorded in 2009 and 2014 must be emulated to sustain optimal production.
“Ultimately, the success of this budget cycle, economic policies and reform strategies rests with the FGN. The sincerity and commitment to a coordinated monetary, fiscal, trade, industry and investment policy execution, the decisive factor,” the report added.