By Peter Apps
LONDON (Reuters) - Sub-Saharan African debt markets remain the preserve of local players and a small number of foreign investors, but greater offshore interest is stirring among funds and houses seeking diversity.
International bond investors have long been involved in the South African government debt markets but war, corruption, default and currency risk have discouraged all but a few from investing elsewhere on the continent.
"There are a maximum of maybe 20 offshore players -- probably more like 10," says economist Gergory Kronsten at WestLB. "It's money from some high-net-worth individuals, and some banks will probably tip a bit of money into them. But there are restrictions on where some pension funds can put their money."
"But if you judge it by the fact that one or two more houses are looking at it then there's definitely more interest," he said.
Almost all Sub-Saharan African government debt markets are denominated in local currency, the main exceptions being South Africa, Nigeria, and Ivory Coast, which have foreign-currency issues.
Standard Chartered economist Razia Khan says in some markets, such as Botswana, interest has increased in recent years.
"In the last four years there's been interest in African debt because yields have been so attractive given the low interest rate environment globally," she said. "What will be interesting is to see if that interest disappears now we're in a tightening cycle."
The average yield to maturity on a five year Tanzanian Treasury bond auction was 9.68 percent on June 10.
Expectations of interest rate hikes from the U.S. Federal Reserve have pushed U.S. Treasury yields, which move inversely to price, to near two-year highs in recent weeks.
Although there is little doubt higher rates in the U.S. will affect the more developed debt market of South Africa, analysts say African domestic currency debt markets will offer some insulation.
"Local currency markets everywhere are more determined by domestic interest rates and pressures," said JP Morgan's Francis Beddington.
TAKING A PUNT
Rising rates could even lead to existing investors returning to debt markets in Kenya and Zambia, where low interest rates have stifled liquidity in recent years.
But African domestic debt markets bring with them foreign currency risks that some would rather avoid.
Investors were surprised in February when Botswana devalued its currency by 7.5 percent. But in other countries, the risk is less currency movement that outright default on the debt.
Even with this risk, Ade Adebajo, director of African Fixed income for Standard Chartered, said some investors were still willing to buy debt from unstable and war-torn states such as Congo or Ivory Coast.
"They're basically taking a punt," he said. "There are some managers in London who would look for opportunities to acquire debt at very discounted prices."
West LB's Kronsten said these investors would often be hoping for the government to recover and for some kind of debt buy-back to be organised together with international institutions.
However, liquid debt markets in Africa's most indebted countries, particularly those countries negotiating for debt relief from the developed world, still seem a distant prospect to Standard Chartered's Khan.
"It's unlikely that the IMF and World Bank would look favourably on these countries increasing their debt burden," she said.
Investors are much more willing to invest in Nigeria's dollar-denominated debt, a staple of some funds for at least a decade. The Nigerian government is also moving to get a domestic currency debt market going, valued at around $10 billion.
"This is a big market by any standards, not just in terms of African markets," says WestLB's Kronsten.
Investor confidence -- and the number of willing investors -- may be boosted by U.S. State Department and U.S. sponsored schemes to get African states credit ratings with agencies Standard and Poor's and Fitch.
Although some market players say they already carried out their own research and the new ratings changed little, others say it has generated demand.
"More information always raises more interest," says JP Morgan's Beddington. "The day Senegal got its rating I got about five calls from people asking if there was anything they could do down there."
Source: Reuters
