UN Agency Cautions Distressed African Economies Against Eurobonds

UNCTAD has cautioned developing nations with a significant risk of debt distress against further issuance of Eurobonds. 

According to the latest Trade and Development Report (April 2024) from the UN agency, issuing high-risk bonds, also known as non-investment grade or junk bonds, results in substantial costs due to the risk premium demanded by investors. This, the report states, has significant ramifications for the debt dynamics of countries experiencing low economic growth rates.

"Implicit borrowing costs, gauged by yields, are substantially above existing borrowing costs, as measured by the average weight of existing bond coupons. The difference is especially large for non-investment grade countries," reads the report by the United Nations Conference on Trade and Development. 

"Consequently, countries capable of issuing bonds do so at higher coupon rates, compared with bonds being currently repaid. This has detrimental effects on debt dynamics, especially in a context of low economic growth, and more broadly on the allocation of public spending."

Bonds with non-investment grade typically receive lower credit ratings from major credit agencies. For example, a bond is categorized as non-investment grade if it has a rating below BB+ from Standard & Poor's and Fitch, or below Ba1 from Moody's.

Bonds rated higher than these thresholds are classified as investment grade.

UNCTAD mentioned Benin, Côte d'Ivoire, and Kenya as examples of eight non-investment grade countries that collectively raised $17 billion through Eurobonds in the first quarter of 2024. Conversely, five investment grade-rated countries issued bonds totaling $28.5 billion.

Overall, bond issuance by developing nations reached a record high of $45.5 billion in the first quarter of 2024.

In January, Cote d’Ivoire's Eurobond garnered subscriptions exceeding $8 billion from over 400 investors. This enabled the country to raise $2.6 billion through two bonds with durations of eight and 13 years, respectively, at interest rates in the single digits. 

Read: Trade and Development Report Update (April 2024)

The interest rates for the respective debt instruments were 6.3 percent for the eight-year bond and 6.85 percent for the 13-year bond.

In February, Benin's sovereign bond experienced oversubscription by six times, driven by increased demand for riskier assets in emerging markets amid anticipation of interest rate cuts by the Federal Reserve. The West African nation received $5 billion in demand against a $750 million target for a 14-year bond priced at 8.375 percent. During the same month, Kenya's National Treasury issued a $1.5 billion Eurobond at a high price to global investors to facilitate partial repayment of a $2 billion bond maturing in June and alleviate concerns regarding potential default.

On the new seven-year bond, the Kenyan government will pay an annual interest rate of 9.75 percent, compared to 6.875 percent on the maturing 2014 issue.

The UN agency highlights that since early 2024, some developing countries have resumed sovereign bond sales, supported by improved conditions in financial markets and expectations of interest rate reductions in major developed economies.

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"Strong bond issuance in the first quarter of 2024, though uncertainties persist for the remaining part of the year and market access remains uneven," it reads. 

"The debt and development crises faced by many developing countries continues to worsen. The increase in public resources and export revenues that must be channeled towards public and publicly guaranteed debt service (to cover both the principal and interest payments) is a key dimension of the current crisis."

As per the report, in 2022, developing nations paid approximately $50 billion more to their external creditors compared to the amount they received in fresh disbursements. Private creditors predominantly drove this shift in the direction of net transfers.

The KES appreciated by 4.7% versus the USD in February 2024, reflecting increased investor confidence following the successful refinancing of the 2024 Eurobond, increased inflows of foreign funds from the IMF and World Bank, and the CBK's policy actions.

Although debt servicing to these creditors remained steady between 2021 and 2022 at around $260 billion, disbursements decreased by 45 percent, dropping from over $300 billion to under $170 billion.

This decline in private creditors' interest in the public debt of developing nations led to the lowest disbursement levels since 2011. Consequently, during this period, net transfers on public and publicly guaranteed debt from private creditors shifted from an inflow of over $40 billion to an outflow of approximately $90 billion.

"The surge in net negative transfers is tied to a significant decrease in access to fresh financing for numerous countries," reads the report. 

"This decline stems from various factors, including higher interest rates in developed countries, deteriorating global financial conditions and mounting concerns about debt distress in developing countries. This dynamic is reflected in the lowest levels of external sovereign bond issuance during 2022 and 2023 in the last 10 years, plummeting to one third of the peak reached in 2020."

The report highlights that the reestablished access to market financing is a positive development, especially for non-investment grade nations, many of which face high risks of debt distress or are already in such a situation.

Nevertheless, concerns persist regarding the sustainability and scope of market access in the foreseeable future.

"Overall, the deterioration of key determinants of debt dynamics underlines the structural nature of debt challenges faced by developing countries,"

The report emphasizes that the absence of advancements in multilateral solutions to tackle various facets of the intricate debt issue, such as sluggish economic growth, profit manipulation and erosion of tax bases, reliance on commodities, susceptibility to climate impacts, and substantial financing expenses, along with the lack of a global financial safety net and efficient multilateral mechanisms for resolving sovereign debt, intensifies the challenges confronting populations in developing nations. This exacerbation manifests in larger fiscal adjustments and jeopardizes the attainment of the Sustainable Development Goals.

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