Rwanda and Costa Rica: riding the wave of cheap money

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By Pan Kwan Yuk

What does Rwanda, a poor African country that has suffered a horrific war and genocide, have in common with Costa Rica, a Central American country of 4.5m best known for its beaches and high-quality coffee beans?

Answer: Both are the latest to benefit from the wave of cheap money looking for returns, by issuing debt at ridiculously low rates.

Costa Rica on Tuesday raised $1bn through a dual-tranche offering – a deal that bankers said was 10 times oversubscribed. Pricing for its $500m 12-year bond came in at 4.375 per cent – much lower than initial guidance of 4.5 per cent and earlier talk of 4.625. Its $500m 30-year tranche was priced at 5.625 per cent – also lower than initial guidance of 5.75 per cent and lower than the 6.058 per cent that Portugal is paying for its 30 year bond.

Rwanda, meanwhile, is looking to sell is first international bond. The central African country, which is rated B, or five notches below investment grade, is looking to raise $400m through a 10 year bond. Pricing is expected to close on Thursday and bankers say they expect yields of around 7 per cent. If so, this would make Rwanda’s financing costs cheaper than those of Greece (11.3 per cent).

The FT’s Robin Wigglesworth has a great quote from Nick Darrant, a banker at BNP Paribas, that pretty much sums up the mood in EM bonds at the moment.

It’s no secret that monetary easing by the US Federal Reserve and the European Central Bank has been suppressing yields in developed markets for a while now – and add Japan’s aggressive stimulus to that mix as well. But with yields on traditional, higher rated EM bonds now exceptionally low, return-hungry fund managers have been venturing further down the credit curve in ever greater numbers.

Among those that have rushed to exploit investors’ hunger for yield include unusual names such as Honduras, Lebanon, Dominican Republic, El Salvador, Mongolia, Guatemala, Bolivia, Sri Lanka, ZambiaAngola and Tanzania.

Costa Rica’s issue is notable because of its 30-year component. Coming as it did on the heels of Panama’s $750m 40-year bond, could this be a sign that investors are increasingly comfortable with longer-dated EM paper? If so, that would be an interesting development given the greater risk for losses in such a long timeframe.

With EM bonds being sold and snapped up at record low yields, the danger for investors lies in what will happen once the US Federal Reserve and other central banks turn off the QE or even begin raising interest rates. New issuers would be forced to offer higher yields in response, pushing down the resale value of EM bonds issued during the current frenzy and potentially delivering a huge blow to portfolios that are holding this paper.

Rwanda’s $400m issue might be a drop in the bucket in the greater scheme of things – some $1,100bn of bonds were sold by emerging markets companies and governments last year. But make no mistake, this bond sale is a big deal for a country whose GDP totalled only $6.9bn last year. To put it in context, if the US was to do a deal on a similar ratio to GDP, it would have to issue $1,000bn.

While you can’t blame Rwanda for wanting to take advantage of the current drop in borrowing costs, this is a pretty big chunk of borrowing to take on.

True, under President Paul Kagame, the country has made big strides in pulling itself away from the ruins of the 1994 genocide and a million Rwandans have edged out of poverty in the last five years. But the economy remains very much dependent on foreign aid, with some 48 per cent of the country’s budget last year funded by international grants. Its narrow industry base – tourism and commodities – means the economy is little insulated from external shocks, such as a surge in oil prices or a drop in coffee and tea prices.

“It is a country that remains vulnerable to shocks, to donor sentiment,” Yvonne Mhango, a Johannesburg-based economist at Renaissance Capital, told Bloomberg. “They’re still in a volatile region of Africa.”

Rwanda is also issuing its hard currency bond at a time when the Rwandan franc is trending at a 20-year low against the dollar. It’s lost 6.3 per cent over the last 12 months alone. If its currency continues to fall against the dollar, this will push up the cost of repayments.

The hope is that Rwanda will be prudent with its finances. The country said it planned to use $200m to repay loans on the Kigali Convention Centre and a development plan for RwandAir, the national carrier. Another $150m will be spent completing the centre and $50m on a hydropower plant.

Make of it what you will. But Rwanda is not a punt for the faint-hearted.

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