Government agencies and major global banks have gained momentum in their initiative to reduce borrowing costs for African countries with the launch of a new index designed to help investors assess bond prices. The iBoxx LSF USD African Sovereigns Index, introduced in late June, tracks the performance of African sovereign Eurobonds accepted as collateral by the Liquidity Sustainability Facility (LSF), a program aimed at enhancing Africa’s underdeveloped short-term financing market by providing daily pricing transparency.
African sovereign debt yields are up to 2.6 times higher than those of similarly rated countries on other continents, according to Bloomberg data. By developing a deeper repo market, the LSF estimates that African countries could save $11 billion over five years.
“This new index will help investors benchmark the true risks and rewards from investing in a diversified portfolio of African hard-currency sovereign debt,” said British Robinson, coordinator at Prosper Africa, a US initiative to encourage trade and investment in Africa.
Established at the UN Climate Change Conference in 2021 and led by Vera Songwe, former executive secretary of the United Nations Economic Commission for Africa, the LSF aims to improve a sovereign-debt market that has struggled to attract a diverse investor base. African leaders have long noted that perception issues increase borrowing costs compared to similarly rated countries elsewhere.
Prominent backers of the LSF, including the White House, the World Bank, and major institutions like Citigroup Inc., have facilitated greater liquidity in Africa’s financial markets through triparty repo transactions. These short-term loans involve a bondholder selling the instrument to a counterparty with an agreement to repurchase it at a slightly higher price shortly after. A third party holds collateral and ensures proper payment.
While crucial for capital markets in developed economies, overnight loans have been limited in Africa, leading to higher credit costs for sovereign borrowers. Although it is early to gauge the success of the iBoxx index, launched on June 28, it has generated enthusiasm among those seeking to improve market conditions.
“Africa, particularly in the hard-currency bond market, didn’t have any real way to directly support a repo market,” said David Escoffier, CEO of the LSF Secretariat. “The aim is to enlarge the universe of potential investors.”
The LSF, funded by multilateral development banks including the African Export-Import Bank and supported by large institutions, aims to facilitate this market development. Citigroup advises the LSF and participated in its inaugural $100 million transaction in 2022. The triparty platform was designed by Bank of New York Mellon Corp. and is operated by Euroclear, while S&P Dow Jones Indices manages and owns the iBoxx index.
The index currently tracks bonds from 14 of the 19 eligible issuers, including Benin, Ivory Coast, Nigeria, South Africa, and Morocco. Those involved expect the index to lead to exchange-traded funds based on its price, ultimately reducing funding costs for African nations. The LSF also plans to establish a similar index for African green, social, and sustainable bonds once sufficient issuances have occurred.
Recent debt sales in Africa show 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, saw orders exceed three times its $1.5 billion issuance in February. Benin’s dollar bonds were oversubscribed by more than six times, and Senegal raised $250 million more than expected in a June Eurobond offering. However, this increased interest has not yet lowered borrowing costs.
“Our goal is to make more African countries eligible and able to access the market,” said Escoffier, who has extensive experience as CEO of Newedge Group SA and deputy head of global markets for Societe Generale SA.
