Eurobond sparks fear of debt crisis

04Jul 2018
Fumbuka Ng'wanakilala
DAR ES SALAAM
Financial Times
Eurobond sparks fear of debt crisis

THE government is considering initiating a foray into international financial markets over the next four years to sell $1.6 billion (close to 4 trillion/-) worth of dual-tranche Eurobonds and raise much-needed hard currency to finance a raft of flagship infrastructure projects.

According to a new Ministry of Finance and Planning debt management strategy report, the possibility of issuing two US-dollar-denominated Eurobonds each worth $800 million is being seriously weighed at this moment in time.

The maiden sovereign Eurobonds, which are envisaged to be sold in fiscal years 2019/20 and 2021/22, will each have a maturity of 10 years.

Tanzania is under pressure to raise massive amounts of money quickly to finance several large-scale public infrastructure projects, while at the same time grappling with lower-than-expected tax collections and a sharp decline in aid inflows from development partners in the form of grants and concessional loans.

Huge investor appetite for high-yield African Eurobonds, plus the fact that Tanzania has now finally secured a sovereign credit rating, are tempting the government to tap into the international credit market to plug the yawning financing gap. But the new ministry report, seen by the Financial Times, has also warned against the pitfalls of international currency borrowing through Eurobonds.

The government’s current strategy is to source 41 per cent of its financing from external sources, including concessional and commercial lenders, while 59 per cent of borrowing is sought from lenders in the domestic market.

  1. strategy is favourable due to substantial funding from concessional sources. However, the increasing need to finance mega strategic projects amid declining concessional sources emanating from the changing global financing landscape renders this strategy less practical,” said the report.

The thinking in government is that the issuance of Eurobonds can help counter the decline in concessional loans, but it would come at a higher cost.

“Eurobonds may pose higher refinancing risks and tend to be costly,” warned the report.

Moody's Investors Service, a leading provider of credit ratings, assigned Tanzania a ‘B1’ credit rating with a negative outlook in March this year - the first time the country has been given a rating by any of the big international agencies.

Plugging the Infrastructure Gap

Although government officials criticised the negative outlook aspect of the rating, some analysts noted that it was actually better than a good number of other African countries.

Still, there is concern within some government circles that while Eurobonds would offer a ‘quick fix’ to some immediate infrastructure funding needs, the risks associated with international currency borrowing are significant as opposed to domestic currency borrowing. Another option being considered by the government is to continue developing domestic financial markets to enable it to borrow more infrastructure funds in local currency.

Said the report: “This strategy aims at minimising exchange rate and refinancing risks on the public debt portfolio as well as shielding the country from vulnerabilities associated with external financial shocks. However, it may increase the cost of borrowing given the fact that domestic debt carries high cost relative to external borrowing.”

“Furthermore, high domestic borrowing may crowd out private sector investment amid limited market absorption capacity.”

Tanzania’s commercial banks have been hit by a spike in non-performing loans over the past two years, which has choked the growth of credit to the private sector. President John Magufuli’s government is implementing a handful of big infrastructure projects as it seeks to transform the country into a regional transport hub and boost economic growth.

In total, it wants to spend $14.2 billion over a five-year period to build a 2,561-kilometre standard gauge railway (SGR) network connecting the main port of Dar es Salaam to the rest of the country and loop in landlocked neighbouring countries such as the Democratic Republic of the Congo (DRC), Zambia, Rwanda, Burundi, and Uganda.

Construction is already ongoing on two sections of the SGR from Dar es Salaam to Dodoma region at a cost of over $3 billion, after the government said it would use its own funds to start building the railway due to delays in securing external loans.

Other major infrastructure projects being implemented by the government include the Stiegler’s Gorge mega hydropower plant, which is expected to cost around $3 billion. Gas-fired power plants, airports, ports, roads and flyovers are also being newly built or expanded, raising the need for more financing to bridge the gap.

Rising Deficit, National Debt

The government has sought low-interest loans from various external sources to finance the SGR project - including China, Turkey, the African Development Bank (AfDB), the World Bank and other lenders - but is yet to succeed in securing the funds.

It has been forced to run a bigger budget deficit to fund infrastructure projects because tax revenues are insufficient to fund public spending, meaning that the state must borrow more money. The budget deficit for financial year 2018/19 is projected to rise to 3.2 per cent of the gross domestic product, up from 2.1 per cent previously.

Tanzania’s external debt stock increased to around $20 billion at the end of April this year, from $18.65 billion recorded at the end of June 2017, according to latest Bank of Tanzania (BoT) data. But the government insists that the national debt is still well within sustainable levels.

“The Debt Sustainability Analysis, conducted in November 2017 using data as at the end of June 2017, showed that the present value of external debt to GDP ratio was 19.7 percent, which is below the international sustainability threshold of 40 per cent, keeping Tanzania’s debt within sustainable levels,” the central bank said in its latest Monetary Policy Statement last week.

Tanzania is not the only African country struggling to raise financing for public infrastructure projects. The continent has an infrastructure funding gap of $87 billion to $112 billion annually, according to AfDB estimates. This strains economic growth in a region that is one of the world’s poorest, despite having vast mineral resources. Sub-standard roads, ports and airports add to the cost of exporting commodities and hamper intra-regional trade.

Experts say a lot of infrastructure development can be done by private companies instead of governments, but public private partnerships (PPP) remain elusive in Tanzania, like elsewhere in Africa.

Should the government opt for the Eurobond route, it may be encouraged by the fact that investor interest, particularly from the United States and Europe, to take up African Eurobonds has been very high, to the extent that almost all issues have been oversubscribed, sometimes up to 10 times. This was the case with the $750 million bond issued by Zambia in 2012.

Zambia’s second $1 billion Eurobond in 2014 also received investor orders to the tune of $5 billion, while Rwanda’s maiden $400 million bond in 2013, Senegal’s $500 million bond in 2014 and Ivory Coast’s $750 million bond in 2014 were eight times oversubscribed, as was Kenya’s $2 billion bond in 2014 that was four times oversubscribed. Kenya’s latest $2 billion Eurobond issued in February this year was also over-subscribed.

Analysts have warned that African nations that are borrowing heavily in dollars may be slipping back into the debt trap and ultimately default on the loans. Some African countries still argue that the funds from capital markets, or sovereign bonds, are a cheaper source of alternative financing.