Size of the Universe

As at July 2019, African eurodollar and local currency sovereign bonds, bills and notes had a total value of around USD 0.5 trillion¹.

The total value of the debt outstanding is concentrated in five countries (South Africa, Egypt, Nigeria, Morocco and Kenya), making up 83% of the total bonds outstanding. South Africa and Egypt make up the most substantial portion of bonds outstanding at, 35% and 28%, respectively. The concentration between South Africa and Egypt does not come as a surprise given that these are the only two countries classified as emerging markets by MSCI. South Africa and Egypt have relatively stable and liquid capital markets compared to the rest of the continent according to the MSCI classification. South Africa’s inclusion into the FTSE World Government Bond Index (WGBI) gives it further access to global debt markets. South Africa is the only country included in the index. The size of its local bond market exceeds USD 50bn, and it has an investment-grade rating by Moody’s giving it access to the WGBI.

Source: Bloomberg, RisCura analysis

Given that investors consider a country’s credit rating when analysing investment risks, the sovereign bonds market has been broken down by credit rating. Rating agencies rate different countries according to the likelihood of default. Moody’s rates countries from a scale of AAA representing prime down to C, which is in default. A country rated from Baa3 up to AAA represents investment grade, while countries rated from Ba1 down to C are below investment grade. Only three countries on the continent have an investment-grade credit rating (South Africa, Botswana and Mauritius). Moody’s rated 25 African countries below investment grade, and 26 countries are not rated. However, the total value of bonds issued by countries, which are not rated is around 3%. Most of the bonds are issued by countries that have a below investment grade rating. Some 64% of total outstanding bonds are below investment grade of which Egypt makes up the majority. South Africa makes up the majority of investment-grade debt which is 35% of total outstanding debt.

Further analysis of bonds issued shows that local currency bonds dominate bond issuance. Local currency bonds make up 83% of the total bonds outstanding while foreign currency bonds make up 17%. The maturity of the bonds issued are longterm bonds. Treasury bonds make up 69% of the total value outstanding, while treasury bills and notes make up 31%.

Bonds outstanding to GDP is below 60% for all the African countries. The higher the debt to GDP, the more a country is exposed to credit risk. Although there is no optimal debt-to-GDP ratio, the IMF highlights that high debt to GDP ratios can cause the debt to become unsustainable.

Egypt has the highest bonds to GDP percentage at around 60%. In Egypt, the local currency bonds as a percentage of GDP is sitting at approximately 49% with foreign currency bonds at the remaining 11%. When looking at South Africa, the total bonds to GDP is sitting at around 51% with local currency debt and foreign currency bonds making up 47% and 5% as a percentage of GDP, respectively.

 

MSCI classifies South Africa and Egypt as emerging markets, and they are comparable to Brazil, China, Mexico, and Poland. Among the emerging markets, Egypt has the highest bond debt to GDP ratio. South Africa and China have the second and third-highest bond debt to GDP ratio at 51% and 43%, respectively. However, in nominal terms, China has the biggest bond market among the comparable emerging markets and the third biggest bond market in the world. The total value of bonds outstanding is USD 5.8trn. South Africa and Egypt have the third and second lowest value of bonds outstanding, respectively. Only Mexico is lower.

 
Africa has a larger number of frontier markets compared to emerging markets. Frontier markets in the continent are analysed together and compared to Bangladesh, Jordan, Serbia and Croatia. Croatia has the biggest bond market followed close by Nigeria and Morocco at USD 42.6bn, USD 41.9bn and USD 40.4bn, respectively. Botswana and Guinea Bissau have the smallest bond markets across the frontier markets, both sitting at USD 1 billion. Despite having one of the biggest bond markets across frontier markets, Nigeria has a low bond debt to GDP ratio at 11%. Morocco has a slightly higher bond debt to GDP at 34%, but lower than that of Mauritius and Croatia at 46% and 70%, respectively.

 

¹Note: Data could not be reliably gathered for the following African countries: Algeria, Cape Verde, Central African Republic, Comoros, Democratic Republic of Congo, Djibouti, Eritrea, Ethiopia, Guinea,Liberia,Libya, Mauritania, Niger, Republic of Congo, Sao Tome and Principe, South Sudan and Sudan.