Over the previous twenty years, African nations have more and more turned to worldwide capital markets to satisfy their growth financing wants. For instance, Kenya and Benin raised a mixed US$2.5 billion by means of bond issuances through the first half of 2025. Proceeds had been used to repay maturing bonds. This implies new bonds, with unfavourable phrases, are being issued to pay earlier lenders.
But African bonds are considerably mispriced, leading to excessively excessive yields that aren’t justified by fundamentals – primarily based on financial, fiscal and institutional strengths. Mispricing happens when a rustic has excessive financial development, steady establishments that help authorities coverage implementation, rule of legislation and accountability, but its bonds commerce at larger yields than these of its friends. In different phrases, there can be each purpose for buyers to belief that the nation will repay what it owes, however they nonetheless anticipate the next return. That is taking place due to ignorance and biases perpetuated by world entities which can be facilitating bond sells in Africa.
Côte d’Ivoire and Senegal have robust development (5% to six.5%), but they face excessive yields on their bonds (7.8% to eight.2%) in comparison with Namibia and Morocco with roughly 3% development and bond curiosity of 6%.
This mispricing imposes a heavy debt servicing burden on already constrained public budgets.
On the similar time African nations face a puzzling paradox: whereas they’re paying extra for the debt they’re elevating, the demand for these bonds is far larger (oversubscribed). All bond issuances in Africa are subscribed by as a lot as over 5 instances. This has solely been frequent in Africa. It’s puzzling why governments usually are not leveraging on the excessive demand to cut price for decrease rates of interest.
For my part, primarily based on my bond pricing modelling experience, I imagine that mispricing of Eurobonds in Africa – debt devices issued by a rustic in a forex completely different from its personal – isn’t a market anomaly. It reveals inside capability failures in African nations, structural market biases and inadequate understanding of the complicated mechanics of worldwide debt markets.
Oversubscription of Eurobonds ought to be a supply of energy for African governments, not a missed alternative. African nations can transfer from being worth takers to cost negotiators. They need to be capable to scale back debt prices, releasing up sources for growth.
However to get there African nations want to deal with the ability imbalance within the markets.
Governments must put money into bond pricing experience to extend their negotiating energy.
The false success sign of oversubscription
There are a number of explanation why African bonds stay mispriced at the next curiosity regardless of the oversubscriptions.
Firstly, a scarcity of technical experience in major bond issuance within the debt administration workplaces of nearly all of African governments. Only a few on the continent have intelligence methods for gathering data on monetary markets and formal investor relations programmes. Neither have they got in-house quantitative analysts or pricing specialists able to participating funding banks on an equal footing throughout roadshows and negotiations.
The debt administration workplaces are unable to have interaction confidently and critically with monetary intermediaries to problem assumptions, simulate pricing eventualities and conduct their very own comparative market evaluation.
After preliminary public presents, most governments don’t interact with holders of their bonds on the secondary market. Nor do they monitor bond post-issuance efficiency. The dearth of curiosity within the secondary market has created a suggestions loop the place poor market intelligence has contributed to excessive coupons on new issuances.
Secondly, superior economies interact buyers usually by means of briefings, roadshows and well timed studies. Communication by African governments is commonly advert hoc and normally restricted to the interval round a brand new bond issuance.
This prevents buyers from forming knowledgeable, long-term views. It results in a default threat premium in pricing.
Thirdly, debt issuance by African governments is commonly politically pushed moderately than strategically timed. Typically this results in rushed or ill-prepared entries.
Generally it’s executed when the price of debt is rising globally, near election cycles, or as a result of governments are going through a monetary crunch brought on by falling reserves.
Learn extra:
African governments have developed a taste for Eurobonds: why it’s dangerous
Fourth, African sovereigns typically strategy the Eurobond market with weak negotiating energy. They’re closely reliant on a small pool of western funding banks as technical advisors to handle the bond issuance. These banks are usually extra inclined in the direction of their very own world funding consumer networks. Their incentives usually are not aligned with reaching the bottom attainable yield for the issuers.
African issuers typically settle for the preliminary worth steering from advisors and comply with excessive yields even in oversubscribed conditions. Even when demand may help a decrease yield, African issuers fail to barter pricing downwards. Issuing syndicates don’t have any incentive to push for optimum pricing for the issuer as they obtain transaction-based charges.
Learn extra:
African countries aren’t borrowing too much: they’re paying too much for debt
The function of bond issuing syndicates is a significant factor within the mispricing. In bond issuance, a syndicate is a gaggle of economic establishments that buildings the bond, worth and market (additionally recognized bookbuilding), underwrite the unsold portion of the bond, promote the bond to their buyers, and guarantee compliance and documentation. These syndicates set coupon charges larger than essential as a conservative hedge in opposition to perceived investor scepticism.
African governments have develop into passive members moderately than energetic price-setters. African-based bond syndicates are systematically bypassed regardless of rising regional capability and distribution networks. Bond points are additionally allotted to offshore patrons, sidelining native institutional buyers.
Breaking the cycle of mispricing
To appropriate the systemic Eurobond mispricing and scale back debt servicing prices, African nations should undertake reforms.
First, governments ought to put money into debt administration capability.
Second, they have to actively monitor secondary market buying and selling to determine alternatives reminiscent of bond buybacks and exchanges that might enhance the debt profile. Actual-time analytics on bond buying and selling efficiency ought to inform future issuance phrases and investor communication methods.
Third, governments should construct institutional routines for submitting information, and proactively interact buyers and score businesses. This can problem and affect threat assumptions. Buyers want constant assurances, particularly on the flexibility to simply exit positions.
Fourth, African nations want to take care of and monitor up-to-date benchmarks from friends with comparable pricing information. With out correct comparisons, it’s tough to know whether or not the proposed bond pricing by syndicates is truthful and correct. They need to cease solely counting on what funding banks recommends.
Lastly, African governments ought to contain no less than one African-based syndicate member, prioritise allocation to African institutional buyers and promote regional preparations with worldwide banks to make sure data switch and equitable participation.
