Lagos — African Eurobond issuers face more scrutiny in the wake of questions about the true extent of the debt loads of Zambia and the Republic of Congo.

Few investors expect the situation in either country to be as bad as that in Mozambique, where the discovery of hidden loans two years ago triggered a financial crisis and sovereign default.

Still, several are querying whether their external liabilities are greater than public figures suggest.

Zambia, Africa’s second-biggest copper producer, denied on Friday that it was hiding debt and showed budget documents detailing borrowing. The Republic of Congo also denied concealing debt.

The questions may complicate funding plans for African governments and companies.

Rising geopolitical tension in the Middle East and Russia, and a tightening of monetary policy in the US, are making conditions tougher for emerging-market borrowers and prompting investors to be more scrupulous.

"In a rising tide, all boats are lifted," said Ronak Gopaldas, a London-based analyst at Signal Risk, which advises companies in Africa.

"But when the cycle turns, that’s when countries with ‘bad politics and bad economics’ are exposed. Investors will scratch below the surface more."

Zambia’s dollar-bond yields rose to the highest in more than a year last week as lenders including Bank of America and Nomura International raised concern about the government’s official numbers for foreign debt.

The securities have lost 2.4% this year, making them the worst performers in Africa in the Bloomberg Barclays emerging markets USD sovereign bond index.

Bank of America said in an April 11 note that Zambia may have contracted $10bn of new loans since 2015, which could increase its debt burden by the equivalent of 30% of gross domestic product (GDP) within five years.

While a default in the near-term was unlikely, "debt worries are justified", said analysts Rukayat Yusuf and Andrew MacFarlane, who are based in London.

The government on Friday reiterated previous statements that its external debts were $8.7bn at the end of December, or around a third of economic output.

‘Nothing to hide’

The International Monetary Fund (IMF), which is in talks with Zambia and Republic of Congo about providing them loans, said this month that the latter needed to clarify exactly what it owed bilateral and commercial lenders. Yields on the central African oil producer’s 2029 Eurobond yields have climbed about 180 basis points this year to more than 10%.

Communication Minister Thierry Moungalla said Republic of Congo had "nothing to hide" and "all financial transactions or debts with its bilateral and multilateral partners have already been given to the IMF".

The lack of transparency is often worse among oil exporters that have not disclosed whether they have pledged future shipments to service debts, according to Bloomberg Economics’ Mark Bohlund.

Debt ratio

He said the problems were not reflective of Africa overall, but may make investors nervous about buying new bonds from the continent.

Fitch Ratings said last week that refinancing risks in sub-Saharan Africa were rising and the region’s average government debt ratio had climbed about 20 percentage points in the past six years to more than 50% of GDP.

"In favourable market or economic conditions, investors lacking adequate transparency are inclined to assume credit fundamentals are in line with available information," London-based Bohlund said.

"But this bias often switches with an adverse shift in those conditions. Investors fear that the situation is worse than what available information suggests."

Luckily for African borrowers, investors still crave higher yields at a time when those in the developed world remain near historical lows. Governments including Nigeria, Ivory Coast, Kenya and Egypt have sold more than $15bn of Eurobonds so far in 2018, which is almost a full-year record for the continent.

‘Broad brush’

Bank of America kept a market-weight, or neutral, recommendation for Zambia’s debt even as it said the chances of the IMF lending the government money anytime soon were slim.

With yields of about 8% on Zambian Eurobonds, "an underweight position would be expensive given the loss of carry", the analysts said.

"Although headlines about Zambia and Republic of Congo over the past couple of weeks have stirred memories of Mozambique’s hidden debt crisis, it would be a mistake to use a broad brush," said Brett Rowley, a MD at TCW Group in Los Angeles, which oversees $200bn.

A further sell-off of Zambian securities would probably present a buying opportunity, he said.

Still, the jitters over the two will not help other borrowers, especially with investors less bullish about emerging markets, according to Gopaldas of Signal Risk.

Average African dollar yields have already risen 66 basis points since early January to 6.31%, according to Standard Bank Group.

"Zambia and the Republic of Congo’s issues are more pronounced than those of other countries," he said.

"But there are others with unsavoury politics and weak balance sheets who could easily lose market confidence. There are a lot of countries in the firing line."