News Column

Barbarians At the Gates - Getting the Money Is Easy

June 9, 2014

Aly-Khan Satchu



I came across the patrician and charming Michael Gondwe, the Governor of the Central Bank of Zambia, in Maputo.

Zambia has found itself in the eye of a storm in 2014, overnight interest rates have recently been hiked to 22 per cent and the currency has fallen by up to 17 per cent versus the dollar, at its worst in 2014 and second only to the Ghana cedi which is down over 20 per cent in 2014.

The International Monetary Fund's arrival in Accra is predicted, predictable and imminent. The IMF said in April: "In a few cases, policy missteps, such as large fiscal imbalances, threaten to undermine the hard-won macroeconomic gains of recent years that have supported growth. In addition, important home-grown risks arise from fiscal vulnerabilities in a number of countries such as Ghana and Zambia."

As you can see, we live in a world where the clock speed keeps increasing and here we are weeks later. Zambia and Ghana are important harbingers for ourselves as we load debt onto our balance sheet big time.

One of my favourite films is Brian De Palma's 'Scarface'. Al Pacino plays Tony Montano, a Cuban refugee who has landed in Miami in the 1980s.

He starts working for a kingpin called Frank Lopez and is champing to go bigger, and Frank asks Tony how he is going to finance this expansion.

Tony offered to help Frank come up with the first five million: "You short a couple a mill, I go on the street for you ... make some moves. Mill here, mill there, you got it".

And as our Cabinet Secretary for National Treasury and his team make their move (San Francisco and Los Angeles last week and Boston, New York and London this week) ahead of a sale of what I expect to be $2 billion (Sh175 billion) of a 10-year dollar-denominated Eurobond and at an interest rate range of 6.95-7.45 per cent; I estimate a seven per cent yield as a likely outcome given the recent backdrop of Africa sovereign bond price auction.

News of IMF support sent Zambian yields to their lowest levels ever at 6.93 per cent. Egyptian Eurobond yields tumbled to 4.73 per cent last week, its lowest level since December 2010, from a peak of 11.07 per cent in June 2013. Essentially, Madam Christine Lagarde's IMF and the market response to Sisi have created a favourable moment for Kenya's issue.

Returning to Kenya, besides this Eurobond, we have taken a very handsome overdraft out with China as well. There is a lot of debt being placed on the balance sheet of Kenya Inc.

Coincidentally, New York-based private equity giant KKR, best-known for its $25 billion hostile takeover of American conglomerate RJR Nabisco in 1988 - which was the subject of the book 'Barbarians at the Gate: The Fall of RJR Nabisco', closed their first African investment in Afriflora, an Ethiopian company that grows about 730 million roses a year for export to Europe.

Neither China nor the international bond markets are Santa Claus. They are in fact the 'Barbarians at the Gates'. When you draw down billions from the street, you have to pay the interest. We sit at an inflexion point. To get from this point to the next will require faultless execution. Getting the money is the easy part.


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Source: AllAfrica


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