The “Tuna Bond” Effect

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In January 2017, the Mozambican government defaulted on a $59.8 million payment on a $850 million sovereign bond that was organized by Credit Suisse and Russian bank VTB Capital. The bond, meant to establish a state owned fishing company, was used, in part, to build ships for the Mozambican navy. The default comes amidst a larger credit crisis for the Mozambican government which is also indebted to the International Monetary Fund (IMF). Unfortunately, Mozambique’s problems may create problems for other African economies. 

Known as the “Tuna Bond,” it highlights the many issues of credibility that the Mozambican government now faces. On top of this default, the IMF has found that Mozambique failed to disclose nearly $1.4 billion in debt prior to the IMF’s most recent loan. Because of this, the country continued to borrow and issue debt despite having an extremely high debt to GDP ratio

The first African bond default since 2011 has many investors worried. Bloomberg’s risk models suggest three other Sub-Saharan sovereigns could potentially default on their loans in the coming years: Senegal, Ghana, and Zambia. This broader fear, and lack of trust in sub-Saharan markets could lead investors to make more risk-averse decisions. Unfortunately, this comes on the heels of already downward trends in sub-Saharan investment.

Downward Trend

The early parts of the decade saw a drastic increase in sub-Saharan debt issuance’s which culminated in 2015. The region issued nearly three times the amount of sovereign debt it issued the previous three years from 2013-2015. Totaling $18.1 billion, the region issued over $6 billion a year on average in that time span. In 2016, sub-Saharan Africa issued just $2 billion from only two countries, South Africa and Ghana.

This downward trend is due to two factors: 1) High coupon rates; and 2) Lack of international interest. In the case of Ghana’s recent bond issuance, the government guaranteed a 9.5 percent yield. The high 9.5 percent rate is not uncommon for African issuers at the moment (South Africa is an outlier in this respect), and many African sovereigns can’t afford that high of a debt burden. International interest in African debt has declined as investors have looked for less risky opportunities. Mozambique’s default does not help to restore investor confidence in African debt markets.

Who Could this Affect?

The “Tuna Bond” effect could almost immediately impact Ghana’s ability to attract further investors; larger economies like Nigeria could also be affected. This February, Nigeria issued the first sub-Saharan sovereign bond of 2017. (The billion dollar bond was issued in Euros.) However, Nigeria continues to have a significant hole in its proposed budget. As such, the country has looked to issue debt in several different denominations and forms, even an Islamic sukuk. All of these efforts failed. It is likely that Nigeria will continue to look for further financing. But, fears that the Nigerian government may not be disclosing all of their numbers, based on investor experience in Mozambique, could drive up bond rates for any future Nigerian issuance’s.

Kenya has also shown interest in issuing international debt in the near future. So has Tanzania, which has ambitious borrowing plans to develop the country’s infrastructure, including a possible $800 million Eurobond this year. The executive director of research at the Bank of Uganda recently commented that for “Uganda to reach middle-income status by 2020 and become a prosperous and modern (nation) by 2040… will be driven by public investments. For that to happen, Uganda’s debt has to increase.” However, investor uncertainty due to the “Tuna Bond” will likely mean that Kenya, Tanzania, and Uganda will all have to take on debt with higher interest rates.

There are many African countries that are developing infrastructure and diversified economic sectors. These projects have often been funded by international bonds. Unfortunately, many international investors tend to view different African governments and markets with the same lens. As such, the current financial crisis in Mozambique threatens the ability of African countries to raise the funds necessary for these projects. At the very least it will likely cause an increase in the interest rates of any bond across the African continent.

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