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AfDB Partial Credit Guarantee to mitigate Cameroon’s Eurobond risk 09 Nov 2015

The rate of African sovereign borrowers have risen over the past couple of years, from Nigeria to Kenya, Cote d'Ivoire to Gabon and recently Angola issued its first $1.5 billion Eurobond on the London Stock Exchange. In February, the Cameroonian government mandated Standard Chartered Bank and Société Générale to arrange the country's first Eurobond to the tune of 750 billion CFA Francs or the equivalent of $1.2 billion.

The search for portfolio diversification and higher yielding assets by international investors supported the increase in the issuance of dollar-dominated bonds by sub-Saharan African countries. But analysts believe that when interest rates in the United States eventually rise, SSA countries would have to bear higher debt-servicing costs.

Fallen commodity prices have put pressure on emerging market currencies thereby weakening their creditworthiness among investors. There are also vulnerabilities to political risk in some African countries.

On July 9, 2015 the African Development Bank (AfDB) approved a EUR 500 million Partial Credit Guarantee (PCG) to cover the payment obligations of the Republic of Cameroon related to the country’s Eurobond currently being marketed. The PCG is an AfDB instrument that serves to partially guarantee debt service obligations of low income countries and those classified as countries with low risk of debt distress and are deemed to have adequate debt management capacity.  

Cameroon will tap into the international capital markets to finance development projects, in particular its Three Year Emergency Plan and long-term investment projects identified in the 2015 budget. According to the AfDB, these development projects are aligned with the bank’s Ten Year Strategic goals (2013-2022) which is to promote inclusive growth and support the transition to green growth. The projects would also impact on the bank’s priority sectors, namely, infrastructure and its agenda to light, feed, industrialize, integrate and improve living standards in African countries.
 
The PCG will help mitigate currency risk that could arise from the Eurobond issuance and also reduce the interest to be paid by Cameroon.

Cameroon’s debt-to-GDP ratio is estimated to be at 19.3% as of end 2014, well below the Central African Economic and Monetary Community (CEMAC) 70% threshold and the level of external indebtedness remains low compared to the average of Sub-Saharan Africa and the CEMAC region. Nigeria’s debt-to-GDP ratio is about 10 percent, which is among the lowest in emerging markets. The debt-to-GDP ratio for Kenya and South Africa is over 40 percent.

In its 2015 Africa outlook, Standards and Poor's affirmed Cameroon's long and short-term sovereign credit ratings at 'B/B'. The country is rated 'B' by Fitch Ratings.