The cautious reentry of Sub-Saharan Africa into international capital markets faces significant challenges, primarily due to growing concerns among global investors about the upcoming US presidential election. This election-related uncertainty threatens the African Bond Market and it’s efforts to secure crucial foreign capital, undermining recent progress after a prolonged absence.
Impact of the US Presidential Election on Sub-Saharan Africa’s Bond Market
So far, only five out of 49 Sub-Saharan African governments — Kenya, Senegal, Ivory Coast, Benin, and Cameroon — have successfully issued dollar bonds this year, collectively raising $6.2 billion. This amount is notably lower than what was raised by the same time last year. Maintaining this momentum is now in jeopardy as emerging markets enter August, a typically slow period for bond sales due to summer vacations.
This year’s added uncertainty stems from the unpredictable developments leading up to the US election. Investors are factoring in political risks sooner than usual, especially with the potential return of Donald Trump. Many anticipate that a second Trump administration might implement fiscal policies that could keep global borrowing costs high, posing a significant challenge for high-yield borrowers such as those in Sub-Saharan Africa.
Historical Trends of Bond Issuances During US Elections
Historically, the months before US elections have been challenging for bond issuances from emerging markets. In 2019, only three sales came from Sub-Saharan Africa between August and year-end. Similarly, in the 2020 US election year, which featured Trump seeking a second term, there was just one such sale.
The expected slowdown in new bond sales is driven by both demand and supply factors. For investors, the US election complicates the landscape for high-yield debt. The recent political shift, with Kamala Harris replacing President Joe Biden as the Democratic nominee just months before the November election, adds to the uncertainty. Harris faces significant challenges, with polls showing mixed support and questions about her ability to consolidate the anti-Trump vote.
Alternatives to Bond Issuance for African Governments
For African governments, high borrowing costs and existing heavy debt burdens reduce the appeal of issuing new bonds. Many nations find alternative funding sources, such as international aid, concessional loans from multilateral institutions, and domestic debt markets, more attractive. These sources typically offer more favorable terms and lower interest rates compared to eurobonds.
Advisors likely recommended that African governments complete their bond issuances before August as Trump’s prospects in the election improved. This strategy aligns with historical trends, where bond sales from the region decrease significantly in US election years.
Current Economic Challenges in Africa
Despite some easing in global interest rates, they remain high in Africa due to persistent inflation caused by weakening currencies. This has compelled many nations to maintain tight monetary policies, further complicating the bond issuance landscape.
Some investors had already anticipated a subdued issuance from Africa this year, even before the current US political developments. According to strategists from Goldman Sachs Group Inc., including Kamakshya Trivedi, the outlook for riskier assets is not as favorable as it was at the beginning of the year. As the year progresses, even a benign macroeconomic outlook is likely to be overshadowed by the US elections, potentially altering the policy landscape in a manner that is unfavorable to emerging market assets.
Sub-Saharan Africa’s efforts to re-enter the primary bond markets are being hindered by the uncertainty surrounding the US presidential election. The combination of high borrowing costs, alternative funding sources, and political risks associated with a potential Trump victory are making it difficult for the region to attract foreign capital. As historical trends indicate, bond sales from the African Bond Market may significantly decline as the election nears, further complicating the financial outlook for these nations.
