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Prospects Weekly: Bond spreads declined in recent weeks across emerging and frontier markets to their lowest levels since May-2013, highlighting a renewed appetite for higher yielding assets.

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Renewed risk appetite among global investors has recently pushed sovereign bond spreads across emerging and frontier markets to their lowest level since May 2013. Following several delayed bond issuances across Sub-Sahara Africa since mid-2013, increasing demand for higher yielding assets could support a return to global bond markets for countries in the region. Significant upward revisions to GDP levels in a number of African countries highlight the extent of past economic transformations and could consolidate investors’ confidence, but do not alleviate concerns regarding current economic headwinds. The continued decline of industrial metal prices in March, driven by weak demand from China, remains a particular source of uncertainty for key exporting countries.
Bond spreads declined in recent weeks across emerging and frontier markets to their lowest levels since May-2013, highlighting a renewed appetite for higher yielding assets. The sharp narrowing of sovereign bond spreads (vis-a-vis US Treasury notes of similar maturity) was visible across all developing regions, albeit less marked in emerging Europe and Asia (driven by concerns about Russia and China). Spreads for African countries dropped on average by 80 basis points (bps) since their peak in early February, reaching their lowest levels since May 2013. The improvement was mainly driven by spreads declining sharply in Cote d’Ivoire and Senegal (respectively by 150 and 115 bps), but also in South Africa, Nigeria and even Gabon (75, 60, 65 bps respectively). Among countries included in the JP Morgan EMBIG index, only Ghana had seen spreads stabilizing at a high level in recent weeks (unchanged from early February, at 650 bps). Increasing demand for higher yielding assets could potentially support a revival of primary market activity in the region, following a difficult start of the year and several delayed auctions since mid-2013 (Gabon, Nigeria, Senegal and Ghana). In April, Zambia was the first African country this year to issue debt on international markets ($1 billion in 10-year dollar bond), albeit at a taxing 8.625 percent yield reflecting country-specific risks. Kenya is planning to issue its first-ever Eurobond later this year, while other countries may take advantage of declining spreads to return to global markets if current conditions persist.
New GDP figures show that Nigeria’s economy is almost twice as big as previously estimated.  Past calculations used value weights and a base year for prices from almost 25 years ago, now updated to reflect the current (2010) structure of the economy. As a result of these changes, nominal GDP for 2013 is now estimated at US$509 billion, 89 percent larger than previously thought, making Nigeria the largest economy in Sub-Saharan Africa and the world’s 26th largest economy (measured at market exchange rates). The rebasing brought into focus the extent of economic transformations in Nigeria over the past two decades. For example, at 21.5 and 16.4 percent of GDP, respectively, crop production and trade are now individually larger than oil production (at 15.6 percent of GDP). The revision has positive implications for income-per-capita and debt-to-GDP ratios but reduces the estimate of the GDP share of fiscal income. In 2010, Ghana conducted a similar exercise that showed that its economy was 63 percent larger, resulting in its reclassification as a low middle income country. The size of the Zambian economy, Africa’s second-largest copper producer, also increased by 25 percent following data revisions in February. Kenya will soon conclude its own review possibly resulting in its reclassification to middle income status. These revisions have important policy ramifications and could consolidate investors’ confidence, but do not lessen current concerns regarding growth bottlenecks, weak governance and macroeconomic imbalances. More than 20 Sub-Saharan African countries still use base years for GDP calculations that are more than a decade old.

Industrial metal prices declined almost 4% in March, continuing the 3-year downward trend. Iron ore and copper declined the most (more than 7% each), followed by zinc and lead. The World Bank’s metal price index is down 34% since its early 2011 peaks. Weak demand by emerging economies, especially China, along with fears of an unwinding of the large volume of collateralized-financed metals held in China's warehouses have contributed to the price weakness. China currently accounts for nearly half of the world's metal demand, up from a mere 5% two decades ago. Global stocks of metals held at major exchanges are still elevated by historical standards, indicating that most metals markets are well-supplied. The continued drop in industrial metal prices represents an important headwind for low income, metal exporting countries, such as Zambia, Democratic Republic of Congo, Guinea, Mauritania, Congo or Sierra Leone. Weaker revenues from metals exports will likely exert a negative effect on growth in these countries.

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