London, UK | – African dollar bonds were sucked into a global rout of riskier markets on Wednesday, falling to multi-month lows as slumping oil prices and worries about the spread of Ebola fanned broader fears about world growth.
Many of Africa’s big economies depend on commodity exports, whether it be oil in Nigeria, copper in Zambia or coffee and cocoa in Ivory Coast. But meek global growth and oversupply mean many raw material prices are at multi-year lows and the strains are showing.
African bond yield spreads over U.S. Treasuries blew out by an average 32 basis points, significantly underperforming the underlying EMBI Global index of sovereign emerging debt, with bonds from Nigeria to Ghana tanking up to 3.6 cents in the dollar.
“It’s all tied to the global environment. Oil prices will affect some countries but the wider sentiment is increasingly negative,” said Stuart Culverhouse, head of research at frontier markets brokerage Exotix.
“People are thinking this repricing shock is going to last a bit longer. If we are going into a permanent period of lower commodities prices that will affect African countries.”
Nigeria is likely to be the worst hit by the oil price plunge, with crude prices now around the levels at which the country balances its budget. Its 2023 U.S. dollar-denominated bond fell almost 3 cents in the dollar to trade at a six-month low.
Although the Ebola epidemic remains largely confined to the minnow economies of Guinea, Sierra Leone and Liberia, worries about its spread in West Africa are mounting.
So far the death toll has reached 4,447 from a total of 8,914 cases, but the World Health Organisation said on Tuesday that there are likely to be 5,000 to 10,000 new cases of the disease a week by December.
The impact of the commodity price slump remained the region’s most urgent issue however. Ghana’s bonds were the worst performers after the country, which sells gold, cocoa and oil, cut its growth forecasts for the year.
The country is in talks with the International Monetary Fund about a rescue package.
The sharp swings came as markets worldwide suffered a rout that saw investors dump stocks and emerging assets and scurry to the safety of U.S. and German government bonds.
Africa has also been a popular play for emerging market investors because of the desire for diversification and the relatively high yields these credits offered.
Excluding South Africa, there are around $18 billion worth of sub-Saharan African hard currency bonds in circulation.
A number of African countries have issued Eurobonds in the past few years as they seek to diversify their fund-raising and secure money for infrastructure investment.
Kevin Daly, a portfolio manager at Aberdeen Asset Management, said African Eurobonds had so far escaped the worst of the selloff witnessed in mainstream emerging economies in recent weeks but Wednesday’s sell-off showed they were not immune.
“We are now in a declining oil environment with general de-risking and slower global growth, all that’s catching up with some of these guys,” Daly said.