Pimco, one of the world's largest bond managers, expects to increase its exposure to Sub-Saharan African debt to tap the region's strong growth prospects, but says limited liquidity and scarce data are still deterrents.
While the investment firm welcomes more dollar bond issues from Africa, countries have to be mindful of their debt ratios which can quickly deteriorate after a couple of forays into the market, Francesc Balcells, head of Pimco's Munich-based emerging markets team that covers the Africa region, said.
International bond issuance by African sovereigns has reached $8 billion so far this year, its highest level ever, according to a report by Moody's published this week, as countries seek new sources of funding for infrastructure projects.
"Some of these countries are very exciting and have great growth prospects," Balcells told Reuters by telephone. "But before getting involved you really have to do your homework because you're there for good. It's difficult to trade on those names."
The availability of information was another concern as "data comes out with huge lags," he said. "This is not a Mexico or a Brazil where every day you have data releases and you can track the developments in those countries very intensively."
Pimco has some exposure to West African oil exporter Gabon's external debt, Balcells said.
It also invests in Nigeria's domestic debt market, mostly since the country joined a key JP Morgan local currency bond index last year. Real yields in Nigeria are high and debt ratios are relatively attractive, but "operationally it's a big headache," he said.
The Newport Beach, California-based firm, which had $1.97 trillion in assets under management as of June 30, has more significant exposure to South Africa, which has the region's most liquid capital markets.
So far, just 14 out of 54 African countries have issued international debt, 11 of those in Sub-Saharan Africa. Nigeria and Gabon issued debut Eurobonds in 2007 and were later followed by Senegal, Namibia and Zambia among others.
Tanzania, which has made big natural gas discoveries offshore, issued a debut $600 million seven-year international bond through private placement in February. Last month, Mozambique sold its first dollar bond, a $500 million seven-year issue that yielded 8.5 percent.
PROSPECTS VS. REALITY
Although ultra-low interest rates in developed countries have driven some yield-seeking investors to Africa's frontier markets, more differentiation between credits is needed, Balcells said, noting that easy money has allowed issuers of varying quality to tap global bond markets.
"The quality of the issuers has steadily deteriorated when it comes down to the new frontier credits," he said. "We started off with names that were very solid, actual commodity exporters ... to countries that had prospects to countries that didn't have anything."
He contrasted Gabon with Mozambique. Although the latter has vast reserves of coal and gas, the proceeds of its bond will go toward its fishing industry.
"Gabon has been a good investment, if anything because what you see is that oil production is fully functioning. This is not a prospect, it's a reality," he said. "Mozambique just issued to fund the buying of a fishing fleet. This is all a prospect but it's not a reality."
Tanzania fell into the second category of "a country that may have prospects for developing more of a commodity base but up until now it falls very short of that."
Future issues by African sovereigns will be well-received by investors as long as they don't lead to worsening debt dynamics, Balcells said. Kenya, Angola, Cameroon and Ethiopia are among the countries expected to issue in the next few years.
"We do expect over time to get more involved but always keeping an eye on how that affects debt ratios," he said. "You don't want these to grow too fast because those countries have to be able to absorb the increase in debt. It's a fine balance."
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