A ground-breaking effort to improve cost of credit for African borrowers, including governments, got a boost with the recent launch of the iBoxx LSF USD African Sovereigns Index, owned and managed by S&P Dow Jones Indices.

This comes in support of the Liquidity Sustainability Facility (LSF) programme, which aims to offer more transparency with daily pricing. This could save African countries some $11 billion over five years, according to the LSF. The index tracks the performance of the African sovereign eurobonds which the LSF accepts as collateral in the framework of repo transactions.

Because the cost of sovereign debt provides the framework for other bonds issued by borrowers in the same country, this could affect a wide range of corporate and infrastructure borrowing costs.

The LSF was established in 2021 by Vera Songwe, the former executive secretary of the United Nations Economic Commission for Africa, who is its chairwoman. Backers and advisors include the World Bank, Citigroup Inc (which also participated in the inaugural $200m transaction in 2022) and the US Presidency. Funding comes from multilateral development banks including the Africa Export-Import Bank (Afreximbank), which issued this press release.

More trading liquidity in Africa’s sovereign debt markets

The LSF is creating a triparty REPO (repurchase) market for short-term sell and buy-back programmes that create overnight liquidity and up-to-date pricing. One party (bondholder) sells the bond to a second party (lender) and agrees to buy it back after an agreed short period at a higher price. The third party (Bank of New York Mellon) holds the bond (the collateral) and ensures the payments go through.

According to Bloomberg journalists Antony Sguazzin and Colleen Goko-Petzer “Those overnight loans are crucial to the functioning of capital markets in developed economies, but they have been very limited in Africa, which, in turn, forces sovereign borrowers to pay higher credit costs.”

Bloomberg news agency (Bloomberg also offers bond-trading systems), has compiled data and says that African sovereign debt offers yields as much as 2.6 times higher than similarly rated countries on other continents. It notes that: “African leaders have long complained that perception issues make it more difficult and expensive for their countries to borrow than peers with similar debt ratings elsewhere.”

According to the Bloomberg report: “Debt sales in Africa this year demonstrate a growing appetite for riskier bonds amid prospects of interest-rate cuts in the US.

“Kenya, rated five levels below investment grade by S&P Global Ratings, received orders for more than three times its $1.5bn issuance in February, before its recent budget debacle. Similarly, Benin’s dollar bonds were oversubscribed by more than six times and Senegal was able to raise $250m more than expected in a June Eurobond offering. However, this increased interest hasn’t yet lowered the cost of borrowing.”

British Robinson, coordinator at Prosper Africa, a US presidential initiative aimed at encouraging trade and investment in Africa said in a press release: “This new index will help investors benchmark the true risks and rewards from investing in a diversified portfolio of African hard-currency sovereign debt.”

However, the Bloomberg report quotes Gergely Urmossy, an emerging-market strategist at Societe Generale, who said that initiatives such as the LSF can help reduce the higher prices paid for African bond risk if they create new liquidity. But to attract more investors, African sovereigns need to improve their fundamental creditworthiness. Reinsurance group Chaucer says African countries saw 15 credit rating downgrades and only 4 upgrades in the 12 months ending 13 May 2024, bucking the global trend where upgrades predominated and accounting for 43% of all global downgrades.

In future, the LSF will also support the growth of green, social and sustainable (GSS) bonds, which will help provided the finance for Africa to progress towards achieving the 17 United Nations Sustainable Development Goals (SDGs) by 2030.

BNY Mellon created the tripartite structure and in a press release, Brian Ruane, CEO of Clearance & Collateral Management, commented: “I think the excitement about the LSF facility is really that the beginning of securities finance, or repo, in African bond markets is likely to 1) make those securities more attractive for investors to hold, and then I think 2) result in lower borrowing costs for African nations due to the liquidity that is introduced into those markets. And what does that mean? It means that African nations will issue bonds at lower rates. Those bonds are going to be used for infrastructure in those countries: schools, roads, airports. Really it’s the beginning of Africa starting to move its way from a securities finance market into that global financing market. And that’s pretty exciting.”

MOBILIST launches the new African bond index

The new index was launched on 28 June at an event in London hosted by MOBILIST, a UK Government programme focused on mobilizing private investment in emerging markets and developing economies through public markets. (For photos of the launch, see this press release).

Louise Walker, Head of Private Sector and Capital Markets Department, Foreign, Commonwealth and Development Office, commented: “Market indices play a significant role in asset allocation. The adoption of new inclusive indices can allow investors to track the performance of a wider range of assets and support allocation to emerging markets and developing economies where it is most needed.

“Supporting the liquidity of African bond markets is essential for market development and improving the attractiveness and viability of the asset class.”

The index tracks bonds from 14 countries including Benin, Côte d’Ivoire, Morocco, Nigeria and South Africa out of 19 issuers who are eligible to be included because the LSF accepts their bonds as collateral.

Often the availability of an index can lead to the creation of one or more exchange-traded funds (ETFs) to offer investors the same performance as the index and its underlying bonds (see S&P DJI factsheet about some of the issuers of other ETFs based on iBoxx indices). More investors into African bonds, including through ETFs, could lower the cost of debt for governments and other African borrowers.

Africa’s bond markets are searching for liquidity (Mosi Oa Tunya, Zimbabwe, photo: ACMN)