Is there more reward for risk bond holders in Africa?

There was a resurgence of political instability in Central Africa during the third quarter of 2023. The military coup d’état in Gabon saw its president placed under house arrest, igniting fears of further neighbouring security threats and doing damage to regional government bond prices. Barely one month prior, a successful military coup overthrew the government of the region’s close West African neighbour Niger.

The majority of the seven successful coups on the continent since 2020 all have taken place in countries that were previously French colonies. Although with some exceptions, democracy in the region is generally fraught and the ritual of elections is often regarded as a thinly veiled, window-dressing charade while the governing party remains in power indefinitely. In some instances, the reigning leaders run their countries as nepotistic fiefdoms while broad-based economic poverty creates a breeding ground ripe for military leaders to sew hatred for the local government and for France, whose treasury still backs the CFA franc currency and its peg to the euro.

The average presidential age of members of the Central African Economic and Monetary Community (CEMAC) is unsurprisingly north of 80 years old, and it is not uncommon to see presidents serving terms spanning several decades. In Gabon, the coup brought the half-century reign of the governing Bongo family to an end. In these political environments, it is understandably easy to rally impoverished citizens against various real or perceived enemies. However, it is important to note that the eventual toppling of a multi-year autocratic regime can be very politically destabilising.

Adding to the disillusionment of citizens, is that Central African countries have been fiscally deteriorating for several years. Some of this can be traced to many of them having undiversified economies relying largely on net exports of oil. They struggled to raise sufficient revenue in the multi-year depressed oil price environment following 2014 and issued large volumes of debt to fund fiscal deficits over the period. Aside from political instability and jihadist military threats, some also face the issue of maturing local oil fields in the context of an economic Dutch disease (or resource curse), which has seen them with no alternative revenue sources that are material enough to support social welfare and fund government activities. Borrowing rates that they can achieve via the Eurobond markets have been prohibitively high, forcing them to rely in large part on support from multiple rounds of IMF development funding programmes.

Exposure to oil producers is an important diversifier in an African fund, given that many African countries are net importers of oil or refined fuel and will therefore underperform in a high oil price environment, as the high cost of fuel imports leads to current account deficits, creates foreign exchange shortages and eats into government revenues via fuel subsidies. That being said, we don’t believe that it is prudent to have exposure to Central African countries like Cameroon, Gabon and the Republic of the Congo, nor in fact to any members of CEMAC, given the current risks, even though we have taken several through our internal credit review processes. In short, we have not felt comfortable with the balance of risks. Instead, investors that have oil-producing exposure in the form of Seplat and Tullow Oil, were rewarded in the last quarter, with performance rising between 4% and 22% on an unannualised basis.

We remain very comfortable with the investment case for Côte d’Ivoire bond holdings and see upside from a diversified agricultural export base and new deepwater oil and gas fields. They also benefit from a very long offshore debt maturity profile of 11 years, with no imminent refinancing risks, as well as an interest burden that is extremely low relative to tax revenue raised (and, in fact, lower than South Africa’s on this metric). While the absolute yields on our Côte d’Ivoire bonds remain high, the spread versus US Treasury yields is tighter than that observed over the last five to 10 years, warranting a minor dilution of the position.

Writer:Thalia Petousis, co-fund manager of the Allan Gray Africa Bond Fund