Countries across Africa and Latin America have expressed a desire to begin or expand the sale of government bonds. Markets seem willing to take them up on their offer.
Interest in the sale of international government bonds has picked up significantly in recent months as the appeal of higher returning interest rates has caught market attention. This has led to a reciprocal fall in investor “flight to quality”, where investors moved to safer and more reliable sources of investment at the onset of the 2007-2012 recession.
This sale of government bonds has seen increasing attention in both Latin America and Africa. Colombia has expanded its sale of government bonds with a $1 billion sale of 2026 maturity securities while Peru sold $500 million in dollar-denominated notes to mature in 2050. In Africa, Ghana, Kenya and Nigeria have all either entered the bond market or have expanded their holdings (with Uganda weighing its options of joining).
The sale and purchase of sovereign debt to private investors is inherently risky, and requires a detailed understanding of both the political and macroeconomic environments of the country in question. It is imperative that a clear understanding of the fiscal and monetary stability of a country be considered, as well as understanding the short-term consequences on interest rates from unexpected developments.
For example, markets reacted fairly negatively to Malawi’s third international sale of government bonds in 2012 due to concerns over the country’s increasing inflationary pressures, and Ghana’s recent bonds have taken a significant beating due to concerns over the Ebola epidemic.
Despite the risks of huge costs in the event of default for both governments and investors (Argentina and Russia are both illuminating case studies of the hazards of defaulting on government debt), the sale of government debt is an alluring source of potential income in developing countries.
In addition, markets appear to be increasingly willing to forgive a lack of creditworthiness when determining the acceptance of government debts (as the recent sale of bonds by Ecuador, Rwanda, and Pakistan illustrate).
There are several indications that the interest in emerging markets’ government debt will continue to rise. With the European Union economy, Germany’s in particular, seeing anemic growth rates, there are fears the world’s largest single market may tumble back into recession. This will likely shift attention for bond investment to developing markets, especially considering certain European bonds have begun to return negative interest rates.
Other major economic players, notably Russia and Japan, are seeing increasing economic tensions that will discourage future investment. Russia’s currency has plunged over 25% in value against the dollar since the beginning of 2014, and sanctions enacted by the European Union and the United States are continuing to pinch major Russian businesses and consumers.
Capital flight remains a significant concern, and growth projections have been downgraded for the next year to 0.5% as the plunge in oil prices will hit the Russian economy hard. Japan’s recent move to dramatically support quantitative easing took financial markets by surprise, though concerns persist that this will not be enough to save the country’s ailing economy.
Many of the governments that have expressed an interest in selling government bonds have made significant improvements in institutional infrastructures to make their markets more favorable to investment. The 2015 Doing Business Index, published by the World Bank, showed significant reforms undertaken by several Latin American and African countries to support investment and trade flows.
Benin, Cote d’Ivoire, Senegal and São Tomé and Príncipe reduced minimum capital requirements to start businesses while Ghana, Rwanda and Madagascar streamlined investment procedures. Colombia, Mexico, and Panama strengthened the legal rights of borrowers and lenders in investing.
Most importantly in this index is the access to credit ranking, which showed dramatic improvements for many of the developing countries currently interested in expanding into the bond markets. The Doing Business credit rank includes two systems of accessing credit, the first on the strength of secured transactions systems (legal rights of borrowers and lenders, as well as bankruptcy laws) and the second on credit reporting.
While this rank is focused mostly on domestic access to credit rather than international forms of credit, the indicator is significant as it notes how seriously these countries take credit in their countries’ growth strategies.
Colombia is tied with the United States for second place in the world for access to credit, while Rwanda is ranked fourth. Honduras is tied with Canada for seventh place, and Peru, Mexico and Guatemala are tied for twelfth. Of the top 20 countries ranked for accessing credit, seven are either in Latin America or Africa. The EU only has three countries represented at this level: Romania (seventh), the UK, and Poland (tied for seventeenth).
In particular, the rise of Colombia from 55th to 2nd place over the course of a single year shows a concerted effort by the government to recognize the importance of strong financial and investment institutions as well as project the potential for investment in the region.
All of these developing economies have illustrated a distinct desire to engage with the global marketplace, and the sale of government bonds can be a significant launching point to achieve this goal. It is likely that interest will translate into both the purchase and sale of international government bonds will increase in the near-future.
Despite all of this positive news, the potential for sudden market instability and government backsliding (seen in countries such as Nigeria, Kenya, Zambia, Burkina Faso, Argentina and Brazil) will remain a perennial concern for these regions.
