Africa’s roads are famous for their terrible condition, so the upscale highway from Ndola to Kitwe (two cities of the “copper belt” of Zambia) seems unbelievable. Road construction in this African country is funded with $ 750 million worth of Eurobonds issued in September 2012.
Copper mining in Zambia
The time of issue was ideal: the Fed planned to buy treasury securities indefinitely to maintain a low rate, and investors in America and Europe sought to acquire debt in dollars, expecting a big profit. Zambia raised $ 12 billion in ten-year bonds at a rate of 5.4%. Even Spain could not borrow at that time under such a low percentage.
The issue of Zambian Eurobonds has confirmed that funds in rich countries are ready to leave home territories, go past emerging markets and enter “border markets” (or markets of countries characterized by high risk or low income), writes The Economist, a British magazine. Even when the Fed’s announcement of the completion of the bond purchase shocked emerging economies, African states continued to receive funds from investment funds. Nigeria and Ghana sold Eurobonds in July. Mozambique raised $ 850 million in September. Gabon reissued the Eurobond in December.
Border markets are usually small in size, illiquid and risky, so many observers were surprised that they were hardly affected by the recent turmoil in emerging economies. The exchange company Exotix calculated the difference in the average interest rate on Eurobonds in 50 border markets (compared with treasury securities). The index difference decreased to 395 basis points. The gap between the Exotix indicator and the EMBI index of bond issuers reached a historic low of 68 basis points this week. The same can be said of the emerging markets stock markets index (MSCI), which began to catch up with the border markets index.
More recently, border markets were seen as an inconspicuous addition to developing-country-oriented funds. Today they are already considered as a separate class, Andrew Brudenel of HSBC believes. Pension fund distributors and consultants now regularly ask how much should be invested in border markets. The growing interest in them is partly due to lower GDP growth in China, Brazil and India. The positive sentiment towards emerging economies in the 1990s is now seen relative to border markets, says Charlie Robertson of Renaissance Capital.
Debate continues about where the border market begins and ends. If these are countries in which there is no developed or developing market, then 23 of the 25 fastest growing economies in the last ten years can be attributed to border markets. But many of these border economies do not have a full-fledged stock exchange, only Qatar is included in the MSCI index of border financial markets. To obtain the necessary qualifications, the stock exchange must have at least two shares that have a certain size and volume of liquidity. The exchange should also be “accessible”, or open to foreign ownership (when capital freely and quickly crosses borders).
Only 24 markets in Eastern Europe, the Middle East, Africa and Asia meet these standards: their total market capitalization is $ 146 billion. In comparison with this, the capitalization of 21 exchanges of the emerging economies index exceeds $ 4 trillion.
There is no doubt that increasing demand will lead to an increase in the supply of shares (this can happen through the sale of a private share or privatization). The expansion of the stock market is welcome. However, access to the debt market for some countries may turn out to be a double-edged sword. Ghana in 2007 issued its first international bond. Then came a sharp increase in salaries in the public sector, and over the course of several years its budget deficit soared to 12% of GDP. Mozambique found itself in a similar situation.
Zambia is trying to use the money received much wiser, directing it exclusively to specific projects. New roads in the “copper belt” are very necessary for the country’s economy, since a large amount of cargo is transported along them. But easy money leads to a weakening of discipline, an increase in the salaries of civil servants, and the budget deficit can rise to 8% of GDP this year. In order to bridge this gap, Zambia is considering issuing new bonds.