The world of easy money is ending
The cheap money available from quantitative easing, used by emerging-market economies to finance growth is coming to an end
The world of easy money is about to end and African governments must use the current golden opportunity to get their finances in order ahead of the withdrawal of quantitative easing (QE).
This was the view of Samad Sirohey, the head of debt capital markets for Central and Eastern Europe, Middle East and Africa at Citigroup, who was speaking at the bank’s Middle East and Africa media and community summit in Dubai on Tuesday.
“At some point soon, QE is going to be unwound. When it does, the world of easy money we have become accustomed too is going to end and the competition for capital will increase,” said Sirohey.
Evidently, these concerns weighed on the mind of deputy Reserve Bank governor Daniel Mminele, who spoke at a seminar hosted by the Federal Reserve Bank of New York on Tuesday. In a speech entitled The impact of a changing global environment on African economies, Mminele described “downside risks” to the local economy and broader emerging-market spectrum flowing from “escalating trade tensions” and a “tightening of global financial conditions”.
“One factor of uncertainty is the future path of risk-free, ‘neutral’ real interest rates in coming years, and how this will continue to affect global investors’ appetite for risk and, in turn, the cost and accessibility of foreign funds for emerging economies,” he said.
The yield on US government bonds and money market instruments are considered a proxy for risk-free interest rates. Sirohey said that in 2017, emerging-market governments raised $200bn in debt by way of bond issuance, 40% of which was raised in Africa and the Middle East.
But the demand has been even greater. “We have seen bids worth $430bn made for the sovereign debt of countries in the Middle East and Africa over the past three years. Typically the issues are over-subscribed by, on average, three to four times,” he said.
According to Sirohey, the net effect of the coming scarcity of money will see global bond investors becoming more selective in their allocation of capital. “As we see a reversal of QE, creditors will be more discerning and will put their money to work in countries they feel are safest and less likely to lose them money. So there is going to be greater divergence between individual credits and this will have an affect on the cost of raising finance.”
African debt levels
African governments have seen overall debt levels rise in response to lower economic growth over the past few years. For instance, SA’s debt-to-GDP ratio, which bottomed at 22% under then finance minister Trevor Manuel in 2009, has steadily climbed in the intervening nine years and currently stands at 53%, according to data compiled by Trading Economics.
Ratings agency Moody’s has said it expects the country’s debt-to-GDP ratio to level out at 55%, one of the central reasons it has offered for not downgrading the country’s credit rating to junk.
Sirohey believes now is the time for everyone to get their house in order. “Governments must prepare for the low-tide scenario. Significant amounts of money will have to be repaid or refinanced by African governments by 2022. So this is a golden opportunity to restructure, and use the cheap money to get your fiscal house in order.”
The taps remain open, though, as emerging markets still offer above average returns. Following the volatility that accompanied developments in Turkey, the yields of emerging-market government bonds represented in the Emerging Markets Bond Index Plus (Embi) have increased by 60 basis points above corresponding US treasuries over the six months to end August, according to Mminele.
At the time of writing, US 10-year government bonds were trading at a yield of 3.08%, while SA’s nearest equivalent, the R186 bond, is currently trading at a yield of 9.09%, representing a differential of 6% above that of the “risk-free” American bonds.
Said Sirohey: “Despite some of the challenges encountered by the likes of Argentina and Turkey, capital continues to flow into emerging markets. On a net basis for the full year, we expect flows will be positive.”