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African credit markets have continued to grow at a rapid pace, while rising debt and falling commodity prices have put pressure on fundamentals. The recent high correlation of African spreads to global EM credit markets has challenged the thesis that Africa offers diversification, but the meaningful intra-regional dispersion offers opportunities, in our view.
Africa credit – a fast-growing market
African credit markets have continued their rapid growth path over the past few years. With USD10bn in sovereign eurobond issuance in 2014 across Sub-Saharan and North Africa, Africa’s share in Barclays Global EM USD sovereign index is now 6.6%, up from 4.9% at the beginning of last year. South Africa and Morocco returned to the market in 2014, but the bulk of the issuance has come from the Sub-Saharan African (ex South Africa) region, including maiden benchmark eurobond issues from Kenya and Ethiopia.
Recommended: Bright Africa 2015 – The drivers, enablers and managers of investment on the continent: RisCura (Report)
We think the growth of the African eurobond market is set to continue, although we believe that some saturation effects may cap the growth rate of issuance in the Sub-Saharan African region. Our forecasts include potential new issuances from Angola, Cote d’Ivoire, Rwanda, Nigeria and Tanzania.
Intra-regional dispersion, but more ‘beta’ than ‘alpha’?
Investors engaged in African credit have been rewarded over the past three years; the Africa subcomponent of the Barclays USD EM sovereign index has outperformed the overall index since 2012.
Looking at spread changes and the correlation of Africa versus Global EM sovereign credit, the thesis that Africa offers diversification and ‘alpha’ potential seems challenged, however. Indeed, correlations between (aggregate) African spreads and Global EM sovereign spreads have been generally high, particularly during episodes of market weakness. A regression of one-week African spread changes against Global EM spread changes suggests that about two-thirds of the variation in African spreads are indeed explained by global market sentiment. Based on these observations, Sub-Saharan African credit appears primarily as a higher-beta version of the Global EM sovereign space.
Recommended: Africa Exchange Guide 2015: African Alliance Capital Markets (Slides)
However, these aggregate observations belie a significant dispersion within the African credit universe. As commodity prices have tumbled, spreads of commodity-reliant African issuers have widened, with Angola, Gabon and Nigeria being the major underperformers since the summer of 2014.
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African Markets Guide 2015: Barclays
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