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politics, frontier markets, bonds, Africa

Don’t believe everything you read

  • 15Aug 17
  • Kevin Daly Senior Investment Manager, Fixed Income

African elections are back in the headlines, apparently for all the wrong reasons. But the reality is better than some would have you believe.

  • Take headlines in emerging and frontier countries with a grain of salt
  • Some African countries, such as Kenya, more stable than one may assume
  • Stay cautious of regional political influence on African markets

In Kenya

Tension has been high around the August 8 Kenyan polls. The result is too close to call, and the opposition leader is already calling foul. For some, it’s stirring uneasy memories of the violence that marred the 2007-2008 elections.

But much of the analysis ignores many of the checks and balances that are now in place. A lot has changed since 2007-2008, not least the election system and the fact that the two protagonists then are now on the same side. Some of the rhetoric implies that violence around Kenyan elections is inevitable.

They should recall, though, that the general elections four years ago passed peacefully. No one should tempt fate, but it’s also worth remembering that the tension we’ve seen so far is nothing compared to what happened a decade ago where hundreds were killed and thousands displaced.

From a market standpoint, Kenyan Eurobonds have performed well this year with the 2024’s offering a yield just above 6%. Kenya is one of the more stable economies in Sub-Saharan Africa. Nairobi is the location for a number of multi-national companies. It has sustainable debt and ample foreign currency reserves (along with the support of the International Monetary Fund if necessary) to help stem any heightened volatility in the currency, which has been stable amid the negative headlines.

In Nigeria

On the other side of the continent, the health of Nigeria’s President Muhammadu Buhari continues to deteriorate and some predict dark times should Buhari be unable to serve out his term. We’ve been here before though, and without drama. When the then-President Umaru Yar’Adua died in office in 2010, the appropriately named Vice President Goodluck Jonathan stepped in without a fuss.

If Buhari is unable to finish his term then there’s little chance for the structural reforms that Nigeria so desperately needs. But Buhari has shown little appetite for reform so his being in office or not makes little difference to whether those reforms will happen.

Governance in Nigeria has continued even as the President’s health has worsened. The country belatedly accepted the need to allow its currency to adjust when the President was in London on a medical trip. The currency adjustment has been largely credited to Vice President Yemi Osinbajo, who would be viewed as a safe pair of hands heading into the 2019 elections.

There’s something more to the appetite for Nigerian debt than the perpetual search for yield. Nigeria issued a 15-year Eurobond earlier this year, which was eight times oversubscribed and the yield has fallen over 1% to 6.7%. Following a long hiatus, offshore demand for local currency debt is also reviving as investors are getting more comfortable with the new currency regime.  

In Ghana

Ghana has had a torrid time in recent years but is a model for democracy in many ways.  It has had a strong dual-party system in which both sides have swapped the leadership mantle going back to 1992, when elections were first restored. There was naturally some skepticism when the opposition New Patriotic Party (NPP) took office in 2016. They inherited a poisoned chalice from the previous leadership who blew a hole in Ghana’s finances and any reputation for fiscal responsibility. After winning by a comfortable 7% margin, the NPP reassured investors that they would stick to the campaign pledge and right the country’s finances.

That might seem like a straw man coming from a party that was voted out less than a decade ago for fiscal indiscipline. But they have unveiled a very credible plan – a fiscal framework capping the deficit at 3.5% of GDP – that is rare in emerging markets, and unheard of in Sub-Saharan Africa.

It would be remiss not to mention that Ghana has benefitted this year from a benign external backdrop to help finance a high fiscal deficit. Foreign demand for local currency debt has been fairly robust while Eurobond yields have fallen to around 7%. The elephant in the Ghanaian room is debt sustainability.

All eyes are on whether they deliver on the fiscal targets under the existing International Monetary Fund program, and the market is pushing Ghana to extend it beyond April 2018. But, for now, the negative headlines about the country, and continent as a whole, remain overblown.

Important Information

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.

ID: US-110817-40677-1