As markets rally off the back of improving economic data from Europe and the United States, problems are brewing in emerging markets, which no longer appear to be the go to growth markets for investors.
Emerging market investor sentiment reached its peak in 2013 when Mozambique issued its now infamous “tuna bond.” Maturing in 2023 the bonds were initially billed as being for the development of a fishing company, but several years later it emerged the proceeds had been used for naval vessels and other security equipment. At the beginning of last month, the country became the first African nation to default on dollar bonds since Ivory Coast in 2011. Mozambique had been given a 15 day grace period by its creditors to settle a $60 million interest bill due in January.
African Defaults Cripple Emerging Markets Debt Market
After Mozambique, there’s now a very real risk that almost a quarter of African nations could go on to default on their debts in the near-term. Ghana has already been granted an IMF bailout, but the county’s bonds tumbled at the beginning of February after the three-week-old government said it found a $1.6 billion hole in the budget. Zambia is in talks with the IMF for a funding deal after the country’s foreign exchange reserves shrank 25% in 2016 to $1.9 billion. The country borrowed $3 billion on the international capital markets in 2012. Meanwhile, Kenya, East Africa’s biggest economy saw its budget deficit explode to almost 8% last year, and ex-Prime Minister Raila Odinga warned investors against buying Kenya’s next Eurobond, saying that almost $1 billion from deal of $2.75 billion in 2014 had vanished.
Elsewhere, in a deal that would make Greece look bad, the IMF has declared that creditors may forgive part of Somalia’s outstanding $5.3 billion debt if the state takes solid steps towards reforming its economy.
It seems investors are not fazed by the wave of fiscal issues sweeping Africa. Bloomberg reports that at the beginning of February international investors purchased 98.5% of a $372 million six-month T-bill issue from Egypt and 97.5% of the same amount of one-year bills. The yield on the securities dropped by almost 2% compared to historic instruments. This is the largest drop on record according to Bloomberg’s data. The average yield on Egyptian one-year securities is 17.725% down 187 basis points from early year issues. While authorities have touted this decline as a sign of confidence in Egypt’s economy, it should be noted that at the beginning of 2016 yields were 12%. To qualify for a $12 billion IMF bailout loan, the Egyptian central bank removed all exchange-rate restrictions and raised its benchmark rate by three percentage points at the beginning of November. While this did result in the loan being granted, Egypt’s currency has now lost 48% of its value since exchange rates limitations were resisted and consumer price inflation soared by 28% year-on-year during January — not the most desirable investment environment for fixed income investors.
Cracks are even starting to show in Turkey’s credit markets. In September, Turk Telekom failed to make a $290 million repayment on its $4.75 billion loan, Turkey’s biggest syndicated borrowing. Another payment is due this month. Some of the country’s largest lenders have more than $1 billion of exposure to the debts.
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