In order to look at the risk of default, let’s first take a look at the rating of long-term debt and sovereign ratings provided by S&P Global Ratings.
70% of the $43 billion in long-term debt expected to be raised by sub-Saharan African nations this year is ‘B’ rated. The only ‘A’ rated debt among the 17 nations analyzed by S&P is expected to be raised by Botswana, forming 0.66% of the overall projected debt. The remaining debt is ‘BBB’ rated.
Of the three nations expected to raise 82% of the total expected borrowing for 2017, South Africa has the best long-term local and foreign currency ratings of ‘BBB’ and ‘BBB-‘ respectively. While long-term local and foreign currency debt ratings of both Angola and Nigeria are ‘B’ rated, S&P’s outlook on Angola’s ratings is ‘negative’ while that on Nigeria is ‘stable.’
Mozambique, whose default we looked at in the first article of this series, has been rated as ‘Selective Default’ on its long-term foreign currency ratings while is rated ‘B-‘ on its local currency ratings – the lowest tied with Ghana and the Republic of the Congo. Among the 17 nations analyzed, the Democratic Republic of the Congo is the worst placed with ‘B-‘ long-term local and foreign currency ratings and a negative outlook.
The primary reason why investors look at emerging and frontier market bonds is because of the higher yields they provide as compared to developed market nations. S&P noted in its report that “all 2016 issues came at a cost, with yields averaging above 9%–well above the about 6% average level enjoyed in 2013-2015.”
This should make sub-Saharan African debt even more attractive to international investors. For instance, Nigeria’s latest issue, yielding 7.875%, was oversubscribed nearly eight times. However, higher yields come with increased risk, as we saw in the case of Mozambique.
Risk of default
In terms of S&P’s local and foreign currency ratings and outlook, the Republic of the Congo, the Democratic Republic of the Congo, Ghana, and Mozambique seem to be the most risky. However, credit ratings are only a part of the overall assessment of risk.
Bloomberg published an article on its sovereign credit risk model for countries from the region according to which four African Eurobond issuers seem to be at most risk: Senegal, Tunisia, Ghana and Zambia. The countries are in order of the probability of default, with Senegal being at greatest risk according to Bloomberg’s model.