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Falling interest rates worldwide and a more stable Africa have together created a perfect storm for debt investment in Africa. Globally, central banks are driving down interest rates and because of this; investors seeking higher yields are investing their money elsewhere. Countries like Zambia, Nigeria, Ivory Coast, Senegal, and Namibia have begun issuing global bonds and investors around the world are quickly buying up these debt securities. Many African countries are finally reaching the point of political and economic stability that is necessary to attract foreign investment.
Global bonds being sold by African countries are currently in very high demand. For example, Zambia last month raised $750 million in a global bond auction, in which demand was 15 times that amount. In a search for higher yields, investors are willing to accept riskier investments. Although political and economic stability is currently present in many of these nations, the default risk of these bonds is comparable to or greater than the default risk on bonds issued by Europe’s most troubled nations.
For the most part, African countries issuing global bonds are doing so to raise funds for the construction of modern highways, ports and power grids. Unfortunately, some African countries are in the middle of conflicts and are experiencing anything but economic and political stability. As a result, investors are unwilling to invest in these extremely high risk securities, making global bond issuance impractical. Hopefully, these African countries immersed in conflict will be able to rise above their disputes and eventually be able to attract foreign investment that can be used to fund infrastructure improvements.
Investors are likely concerned about the “stability” of these nations and whether or not these countries will remain stable throughout the life of their investment. Conflicts are commonplace in African nations today and investors must decide whether the potential high returns on these investments are worth the default risk.
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