Galvanising Nigeria’s Economy Through Eurobonds

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ANALYSIS 

Goddy Egene writes that raising funds from the international market will go a long way in improving the country’s infrastructure base and boosting the economy

Efforts to diversify the nation’s economy are being intensified   following the realisation that depending on crude oil as the  major revenue earner for the country is unsustainable.

The fall in the price of crude oil has affected the nation’s revenue and has become a big challenge, hence the government is striving to ensure there is urgent need to develop other sectors of the economy in order to increase the revenue stream.

However, for the diversification to be successful, the infrastructural base has to be improved upon. Considering the low revenue from oil, financing this infrastructure with only internally generated revenue would be a hard nut to crack.

 Eurobond option

This was why the government has decided to fund part of the 2016 budget through borrowing from foreign investors.  This led to the determination of President Muhammadu Buhari – led administration   to tap into international debt markets to raise bonds for the first time in three years. The bonds, according to the government, would be project-specific infrastructure ones. Project-specific bonds have been used in many countries for greenfield and brownfield projects. Canada is said to be the country that mostly relies on capital markets to finance infrastructure projects.

Specifically, the government is expected to raise $1billion through Eurobond for capital expenditure this year. The Minister of Finance, Mrs. Kemi Adeosun said unlike in the past when bonds were raised for recurrent expenditure, funds to be raised by the current government would go for specific projects that would help to galvanise the diversification of the nation’s economy.

Speaking in the same vein, the Director General of Debt Management Office (DMO), Dr. Abraham Nwankwo said that most of our natural resources are still lying free.

“Therefore, given that we need to generate more growth and development and reduce poverty, it is imperative for us to augment domestic resources with external resources for it to accelerate growth and development, it will not be reasonable to depend only on local resources,” he said.

Nwankwo said Nigeria’s low debt to Gross Domestic Product (GDP) ratio means the country can borrow more to fund budget, infrastructure and other essential projects that will stimulate the economy and create jobs for the citizenry.

The 2016 budget has a deficit financing that requires an additional N1.84 trillion for capital expenditure, which should be funded through borrowing from local and international markets through the supervision of the DMO.  Hence, the plan to issue $1billion Eurobond this year.

 Road show

Adeosun has led a team of Nigerian officials on a road show to the United Kingdom (UK) with the purpose of meeting global bond investors to ensure successful issuance of the bond.

 During the road show government team stated its willingness to stimulate the economy via the proceeds from the proposed Eurobond, while investors demanded to know when and how the Central Bank of Nigeria (CBN) will end capital controls and a currency peg policy which some said had starved the country of dollars and slowed foreign investment into the country.

However, the flexible foreign exchange policy introduced by the CBN has addressed those that issue, just as Adeosun explained the decision to borrow in dollars.

She said: “The reason we are borrowing in dollars is because it is relatively much cheaper than yields we can get on the local bond markets. We intend to gradually increase the stock of dollar denominated bonds to about $20 billion from $13.2 billion.”

Positive outlook

One of the critical take home the minister and her team’s visit to the UK is that the foreign bond investors are interested in participating they are concern about the hitherto rigid foreign-exchange regime of the country which they blame for draining its reserves

For instance, the second-biggest United State bank by assets, Merrill Lynch, said Nigerian Eurobonds would rally more if the government allowed the naira to weaken. A move the government has accepted, thus allowing the Naira to find its true market value.

“Without some kind of exchange-rate reform, we doubt the market would look favorably upon a Eurobond,” a London-based economist at Exotix Partners LLP, Alan Cameron said.

 “Feedback from our clients suggests that the removal of the naira peg would be a positive catalyst for the dollar bonds,” a Sub Saharan Africa Economist at Bank of America Merrill Lynch, Oyin Anubi, said.

“The dramatic slowdown in economic growth combined with uncertainty on foreign exchange and risks to oil production means that this is a difficult time to invest in Nigeria,” he added.

However, the fact that this is not the first time Nigeria is trending this part coupled with the performance of previous bonds issued in terms of return to investors give hope to prospective investors. In mid-2013 the country raised $1 billion of five and 10 year debt from the international market.

Latest analysis reveals that yields on the $500 million securities maturing July 2023 gained 8.3 per cent in 2016 compared with an average of 9.6 per cent for high-yielding emerging-market sovereign dollar-debt tracked by Bloomberg.

Besides, the Bloomberg analysis further revealed that “Yields on Nigeria’s existing dollar debt are almost twice as high as those for Kazakhstan and Colombia, two other developing-nation oil producers.”

Although some stakeholders have raised the alarm over the level of Nigeria’s indebtedness, the country’s debt-to-Gross Domestic Product (GDP) ratio, a measure of overall indebtedness, is very low compared to its peers.

For instance, Nigeria’s debt-to-GDP ratio among the lowest in emerging markets at 10 percent, with just $8 billion in sovereign debt outstanding in hard currency, is an indication that it should be preferred by investors. The ratio for Kenya and South Africa is over 40 per cent.

“Nigeria’s external debt-to-GDP is still very small, the total size of the Eurobonds relative to everything else is tiny,” Anubi said.

“Even though we are moving into a situation where the fiscal deficit is worsening and the current account may slip into a deficit, again – compared to many other emerging market economies – the situation is not bad,” he added.

However, local investors appear not to have toed the line of government, Economist and Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, believes the timing for the proposed bond raising is wrong.

He said: “Nigeria currently has a high-risk profile. The rates are high now. I think the plan to approach multilateral agencies will have been a better option.”

In the opinion of Managing Director, of investment firm,  Afrinvest (West Africa), Mr.  Ike Chioke,   “clearly there has to be better alignment in resolving our domestic macroeconomic issues, which also will reflect how international bond investors will look at an international euro bond issuer like Nigeria.”

“People may think they are disconnected, they are not, they are all tied together. So when we have for instance an exchange rate mechanism that is not tied to a structural change that has happened to our economy, which is that our dollar based income has fallen by more than 50 per cent and we have not made adequate adjustment to the exchange rate, investors who may say they want to lend to you in dollars may have concern about the capacity of funding. I can’t see the country doing above a billion dollars in a single issue. I think a team of good advisers could raise that money within three months all things being equal,” Chioke said.

On his part Okan Akin, a strategist at asset manager AllianceBernstein believes that Nigeria is the best place to invest in Africa now. His words: “If you are investing in places like Africa, we believe it’s better to buy Nigeria because there is a local investor base. They usually step up and buy when international guys sell.”