A long way to run for frontier African yields

AFRICA MONEY-A long way to run for frontier African yields

By Ed Cropley, African Investment Correspondent

JOHANNESBURG, May 26 – Kenyan debt yields have spiked sharply higher across the curve in the past week but they remain way below inflation, suggesting foreigners are going to be staying well clear for the time being.

As such, outside cash coming into the bond market to support the ailing shilling is a distant prospect.

One-year treasury bill yields are now near 6.8 percent compared to inflation of 12.05 percent in April, giving a real yield — one of the yardsticks used to assess the pros or cons of high-risk frontier markets — stuck well in negative.

“Rates will need to adjust higher for Kenyan securities to look attractive. It’s an exotic place, a risky place, so when foreign investors make a decision to go there, it’s only if the real yield is high,” said Coura Fall, an Africa analyst at Citi in Johannesburg.

“You might see some nibbling when it’s a bit positive — say 2-3 percent — but I would say it’s attractive when it’s at least 5 percent.”

Such a projection implies yields above 15 percent before serious foreign cash decides to move in, a factor that would lend some support to a currency that has been on the back foot for most of 2011.

The shilling hit a record low of 87.15 to the dollar on May 18, although traders say it should get some support in the next few days from tightening of domestic liquidity by the central bank.

Expectations of an interest hike at a Monetary Policy Committee meeting next week are also lending a hand, although most analysts predict only a 50 basis point rise in the benchmark rate to 6.5 percent — hardly enough to make a dramatic dent in overall yields.

That said, one analyst out of 17 polled by Reuters is predicting a 200 basis point hike, despite the central bank’s previous aversion to anything that might compromise economic growth.

A similar story is playing out in neighbouring Uganda, although the monetary authorities in Kampala are not deemed to have fallen as far behind the inflation curve as their Kenyan counterparts.

Due in part to a weakening currency, Ugandan inflation has rocketed to 14.1 percent in April from virtually zero at the back end of last year, and although yields have also jumped, 1-year debt is offering only 11.2 percent.

Nigeria also has negative real yields, leaving Ghana to stand alone in frontier Africa’s more accessible markets with bond returns above inflation.

Yields on 1-year Ghana paper are 11.7 percent compared to inflation that dipped to 9 percent in April. The relatively stablility of the cedi at around 1.5 to the dollar, it is nearly flat on mid-2009 levels — only increases Ghana’s attractiveness, suggesting healthy foreign appetite for a $200 million 3-year bond auction due in a week.


Source: Reuters Africa newsletter

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