Africa’s Junk Bonds - Key investments areas with high returns

Africa’s Junk Bonds -  Key investments areas with high returns
  • Seven of the 12 top-performing emerging-markets this quarter are in Africa.
  • Angola, which is in discussions to reorganize some of its loans, leads the pack with a return of 74%

Africa’s sovereign bonds – Credit rating agency have expressed 'very' great concerns about the ability or the willingness of the African government to meet its commitment to the obligation to pay debts.

The high yield bonds which have been rated junk have been among the biggest beneficiaries of the 'risk-on mood' that’s sweeping global markets as economies reemerge from the pandemic.

Seven of the 12 top-performing emerging-markets this quarter are in Africa. Angola, which is in discussions to reorganize some of its loans, leads the pack with a return of 74%, compared with the 9.5% average for the 74-member Bloomberg Barclays Emerging Markets Sovereign Index. Zambia, which is restructuring its debt, isn’t far behind at 40%.

Investors have been cautioned to look before they leap: The coronavirus pandemic is still spreading in most African countries, economies hard-hit by the disease and U.S.-China tensions that could instigate trade war makes the environment volatile.

“In line with the global risk-on mood, African hard-currency bonds alongside equities have been on a tear,” said Neville Mandimika and Daniel Kavishe, analysts at Rand Merchant Bank in a note to clients. “Markets have shrugged off these concerns.”

Gabon and Nigeria posted returns of more than 30% this quarter, while Ghana, South Africa, and Egypt are deep into double digits.

Why Junk bonds could leave a sweet bitter taste in the long run

Average yields on African sovereign dollar bonds declined 234 basis points since the beginning of May to 8.19%, according to the Standard Bank Africa Sovereign Yield Index. While momentum is carrying the rally at present, the pace of gains could slow in months ahead if the risks worsen, Mandimika and Kavishe said.

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A taxi driver wears face mask at the Nima market, as Ghana lifts partial lockdown amid the spread of the coronavirus disease (COVID-19) Image Reuters

Who will be affected by Africa's Junk bonds status

Investors wary of non-investment grade bonds can cause the depreciation of the exchange rate which is likely to trigger the cost of goods to surge as the currency weakens.

It can have a good or bad effect on international trade depends on what side you are on, but produces, taxpayers, and consumers are likely to bear the brunt of the impact of weak exchange rate.

Decades ahead African government will have to budget for interest payment which practically means taxpayers will have to finance the interest on these bonds. Government spending will be affected as well which could explain the infrastructural deficiency prevalent in most African developing countries.

Amongst other things, short term interest rates can move upwards which ultimately scraps off GDP.

Junk bonds are not in its entirety unusual but it is regrettable taking its debilitating consequence on Africans development in the long term.