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How debt bailouts and commodities are driving investors to wager on Africa’s frontier debt


Africa’s frontier debt is beginning to catch the eye of investors amid a wave of rescue package pledges from global financial institutions and China.

The relatively high price of raw materials is adding to the appeal of the region.

Money managers including BlackRock, Neuberger Berman Group and UBS Group have made choice bets on eurobonds on the continent, Bloomberg holdings data shows, with general sentiment favouring Angola and Ghana.

That is a change from two months ago, when traders could not exit Africa fast enough.

Yields soared to record highs — exceeding levels reached during the Covid-19 pandemic and the collapse of Lehman Brothers Holdings in 2008 — as investors fretted that poorer nations would default amid surging food and energy costs.

“The past 12 months have been particularly tough for frontier markets,” Regis Chatellier, director of EM strategy at Oxford Economics, said in a note to clients.

“But beyond the negative headlines, we see scope for optimism.”

Since July, there has been a turnaround. The International Monetary Fund has been working towards agreements on bailouts with vulnerable nations including Zambia and Ghana.

China, Africa’s largest bilateral creditor, also announced waivers on loans of 17 African countries.

Yields have subsequently dropped, but remain way above their 10-year averages.

Bailouts, valuations and commodities are all reasons to be optimistic on the asset class, Mr Chatellier said.

Raw material prices have risen amid the lingering conflict in Ukraine and the sanctions against Russia — both countries being major exporters of commodities.

Thermal coal prices reached record levels owing to logistical supply snags and robust demand in Europe and Asia.

“Admittedly, commodities have repriced to the downside in the last few weeks, but we expect them to stay elevated by historical standards” and “terms of trade and external balances should remain well supported,” Mr Chatellier said.

Between the second quarter and now, BlackRock almost doubled its holdings of Angola’s eurobonds maturing in 2028. UBS also added to its ownership.

Jens Nystedt, a senior portfolio manager at Emso Asset Management in New York, said he favoured Angolan debt along with that of Nigeria, Zambia and Mozambique.

Oxford Economics upgraded its view on Angola to heavy overweight.

Angola is supported by oil prices that have enabled it to almost halve its debt ratios in two years. The currency has benefited, with the kwanza the second-best performer against the dollar in the world this year.

The past 12 months have been particularly tough for frontier markets. But beyond the negative headlines, we see scope for optimism

Regis Chatellier, director of EM strategy at Oxford Economics

That has fed into slowing inflation at a time when most nations are struggling to keep price growth under control.

A successful election last month means country-specific risk is also out of the way.

“The country has confirmed the reformist agenda can continue politically and has oil supply as its main asset that will continue to support it,” said Rob Drijkoningen, a portfolio and managing director at Neuberger Berman Europe. “We continue to like it, subject to valuations, of course.”

For Maciej Woznica, a fixed income portfolio manager at Coeli Frontier Markets, Ghana is attractive.

“Pricing in particular among the special situations like Sri Lanka and Ghana is below our expected recovery rates,” he said. “Not every day do you get a chance to buy below recovery values in credit.”

Updated: September 18, 2022, 4:30 AM

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