Kenya's Eurobond success indicates improved appetite for African debt

Kenya has pushed ahead with its Eurobond while Nairobi's officials negotiated with their Nigerian counterparts on preferential pricing for oil and gas purchases. Market watchers are drawing attention to the parallels between Nigeria and Kenya in that they are politically important and dynamic economies facing growing security risks.

Kenya's Eurobond has gone ahead with outsized interest for the US$2 billion bond, apparently more than four-times over-subscribed. International investors seem prepared to accept yields of less than 6% for a five-year tranche and less than 7% for the ten-year tranche of the issuance. These rates were significantly below analyst expectations of 7.5% or more if Kenya were to raise as much as US$2 billion.

Eurobond issuances are less of a factor for Nigeria - which issued a US$1 billion Eurobond in May 2013 - than for smaller economies seeking to announce their impact on the capital markets. The low yields are, however, a notable indicator that - despite the US Federal Reserve tapering earlier this year - investor interest in emerging and frontier market (including African) debt is increasing which, in turn, may have implications for even non-sovereign African fundraising.

Africa may also be fortunate that the highest profile emerging market debt negotiations are currently in Argentina, as ruthless bondholder "vulture funds" circle. This continues the saga that once led to the 2012 impounding of an Argentinean navy training vessel at a Ghanaian port in 2012 following a pro-bondholder ruling by a US court.

Kenya, following Nigeria's lead, has also announced its revised GDP figures following its "rebasing" exercise. Its 20% revision increase is proportionally less than Nigeria's GDP rebasing announced earlier this year. The revised calculations of the Kenya National Bureau of Statistics indicates, however, that Kenya's 2009 GDP was US$37 billion rather than US$31 billion which implies that its current GDP is around US$50 billion. This is according to investor disclosures in its Eurobond prospectus.

For more news and expert analysis about Nigeria, please see Nigeria Focus and Nigeria Politics & Security.

© 2014 Menas Associates

Kazakhstan increases crude oil export duty

The Kazakhstan government has increased the so-called ‘export customs duty’ (ECD) on crude oil from $60 to $80/ton. This change will take effect on 1 April, according to economy and budget planning minister Yerbolat Dosaev, who unveiled the new export tariff at a ministerial meeting.

The ECD increase should boost this year’s projected government revenue by $2.7 billion. The economy ministry has added $1.6 billion to this total in the form of extra tax income to be derived from the exporting industries’ future profits, which are widely expected to ameliorate after the 20% devaluation of the tenge in February 2014.

The ECD was introduced in May 2008 at the rate of $110/ton at a time when international oil prices were as high as $125/barrel. It was argued that the new duty would enable Kazakhstan to benefit fully from increasingly favourable conditions on global markets as well as its expected stabilising domestic effect.

In January 2009, however, the government scrapped the ECD after oil prices had fallen from their historic highs. As the global market stabilised the ECD was re-introduced in August 2010 at the rate of $20/ton. This was applied to all Kazakhstan-based oil exporters except those whose production-sharing agreements guaranteed stability of the customs regime. In January 2011 the ECD was increased to $40/ton and then again to $60 in April 2013.

The government plans for at least 6% GDP growth by the end of 2014, while also containing annual inflation below a 6–8% cap. The benchmark oil price that serves as the basis for all income and expenditure forecasts has also been increased, from $90 a barrel to $95. Some local analysts have already expressed their scepticism about the latter benchmark, given the possible impact of the crisis in Ukraine on future global oil market stability.

Earlier this month the US administration announced its intention to release around 5 million barrels of crude to the market and cited the need to test the sustainability of the US oil infrastructure after a recent surge of domestic production. Some have seen this, however, as a calculated move as part of Washington’s efforts to punish Moscow for its combative stance on

Ukraine’s Crimea peninsula.

While this quantity is clearly too small to have any significant impact on oil prices, expanding US domestic production may upset both Russia’s and Kazakhstan’s medium- to long-term price expectations.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2014 Menas Associates

Ghana: Markets react positively to verdict

As one might expect the Supreme Court verdict in favour of the NDC and Mahama was positively received by the financial markets, which had been perturbed by the uncertainty created by the impending decision, the risk of unrest, the impact of a full or partial election re-run, and the partial paralysis of Ghana's political system due to this uncertainty.

In financial terms as the confidence of investors in Ghana increases, yields - or the implied market-demanded effective interest rates on outstanding bonds, given bonds' market price - on Ghana's cedi denominated bonds have indeed been falling. Rates on the planned September auctions of around 600 million cedis worth of bonds have perhaps fallen by between 2%-4% to as low as 17% - a rate not to be confused with the much lower rates and yields on the dollar denominated Ghana Eurobond.

 

Cedi depreciation may well also be slowed as investors stop the shift to dollar-denominated assets due to electoral uncertainty - with Elvis Darku of Nigeria's Access Bank projecting a slight cedi appreciation versus the dollar by the end of the year. This is even if other analysts remain pessimistic and unlikely to shift from predictions of further cedi decline, even with the recent influx of Eurobond dollars and expected receipt of Cocobod financing dollars through the agreed US$1.2 billion syndicated financing facility which should both increase dollar supply and thus reduce its relative price compared to the cedi.

 

On the inflation front, despite double-digit inflation and the impact of cedi depreciation on inflation due to relatively more expensive (in cedis) imports, the most recent release from the state Ghana Statistical Service (GSS) indicates that July producer price inflation has fallen by 0.5% in month-on-month terms and by 2% points on a year on year basis, to 5% for July 2013 compared to July 2012 (whereas the June producer price level was 7% higher than that in June 2012).

 

Although this may seem like positive news, further detail revealed by GSS statistician Dr Philomena Nyarko indicates that while manufacturing inflation rose from 10.6% to 10.9% (year-on-year), mining and quarrying inflation fell significantly into the sub-zero zone partly due to lower gold prices - a factor which (broader implications for Ghana's economy aside) is unlikely to cause sustained inflation relief.

 

For more news and expert analysis about Ghana, please see Ghana Politics & Security.

© 2013 Menas Associates