Diaspora Bonds as Mark of Confidence in the Economy


Christian Chukwu writes that Nigeria’s first diaspora bond issue in the international capital market has increased investor appetite for the country’s debt instruments

In this season of national despondency over economic recession, there is something to make the heart glow. The world is passing a verdict of optimism on the Nigerian economy and its managers. On June 19, Nigeria successfully issued its first diaspora bonds in the International Capital Market to raise the sum of USD300 million at the rate of 5.625% for a tenor of five years.

This feat made Nigeria the first African country to issue a bond targeted at retail investors in the United States, a market highly regulated by the United States Securities and Exchange Commission (U.S. SEC). The only previous U.S. SEC registration for an African country was targeted at institutional investors.

As impressive as this is, it is not the only good news. The bigger gain is that Nigeria received the approval of the US SEC, an achievement that is not possible unless a country has attained the highest level of transparency and accountability in its economic process. It is good news for Nigeria, and this should positively impact the country’s credit rating, transparency rating and financial market development index rating.

Also the issuance of bonds registered by the US SEC provides an opportunity to access a wide range of investors. In addition, Nigeria can now routinely access funds from private banks and wealth managers in the US and European markets. This opportunity is not available to other developing countries that have only issued Eurobonds. The diaspora bonds are the first bonds issued by an African sovereign registered with both the US SEC and the United Kingdom Listing Authority (UKLA), and targeted at retail investors.

The Debt Management Office, DMO, with Dr. Abraham Nwankwo as Director General, must be satisfied with the successful issuance of the bonds.
It followed series of road shows in the US, the UK and Switzerland organised by the DMO. Meetings were also held with investors in these countries to determine pricing. The bonds will be direct general obligations of Nigeria and are denominated in the U.S. dollars. The international Joint Lead Managers are Bank of America Merrill Lynch and The Standard Bank of South Africa Limited, while the Nigerian Joint Lead Managers are First Bank of Nigeria Limited and United Bank
for Africa Plc.

Diaspora bonds are issued by a country to its own citizens abroad to tap into their wealth in the adopted developed countries. They are essentially a form of government debts that target members of the national community abroad. The sale of the bonds can be restricted solely to members of a particular nationality or opened to all buyers, with nationals receiving a preferential rate.

Nigeria has suffered from deficits in the national budget in recent years. Nearly N2.36 trillion is expected as deficit in the 2017 budget passed two weeks ago by the National Assembly and signed into law by acting President Yemi Osinbajo. The budget deficit is to be financed mainly by borrowings which have been projected at N2.32 trillion. Out of this amount, N1.07 trillion (46% of this borrowing) is intended to be sourced externally while N1.25 trillion will be sourced domestically.

The DMO has issued Eurobonds in the international market and had recently launched the first-ever Federal Government Savings Bond targeting retail investors in the country. Both have been quite successful, indicating investors’ confidence in the Nigeria economy.
The Diaspora Bonds are an addition to the menu, and one of the most innovative products from the staple of the DMO. Only two countries have successfully issued Diaspora Bonds – Israel and India – and Nigeria has now joined that list. Diaspora Bonds are tangible and effective financing options for countries that have substantial diaspora populations.

Nigeria is among the countries with significant diaspora populations and huge remittances from abroad. There are over 17 million Nigerians living abroad, and most of them reside in the US and the UK. According to the World Bank’s Migration and Remittances Fact book 2016, remittances from Nigerians living abroad hit $20.77 billion in 2015, making Nigeria the sixth largest recipient of remittances in the world.

The report says remittances to Nigeria rose every year over the last decade, from $16.93 billion in 2006 to $20.83 billion in 2014. And in 2016, remittances by Nigerians abroad were over $35 billion. This was the highest in Africa and the third largest in the world. The top two sources for Nigeria’s diaspora remittances in 2015 are the United States ($5.7 billion) and the United Kingdom ($3.7 billion).

The Diaspora Bonds have opened a new source of financing for the Federal Government of Nigeria for funding projects for the development of the country. President Muhammadu Buhari’s administration is currently working on delivering several capital projects. Out of a total expenditure outlay of N7.44 trillion in the 2017 budget, N2.36 trillion is for capital projects.

The budget has been designed to focus on five key execution
priorities. These are stabilising the macroeconomic environment; achieving agricultural and food security; ensuring energy sufficiency in power and petroleum products; improving transport infrastructure, and driving industrialisation with a strong focus on small and medium scale enterprises.

This new window of diaspora bonds further enhances the funding liquidity and flexibility of the Nigerian economy, which are necessary characteristics as the country gathers momentum towards the attainment of advanced economy status.

The Diaspora Bonds were targeted principally at the Nigerian Diaspora to provide them with an opportunity to contribute to the national development. The Bonds were structured as a retail instrument to appeal to a wide base of investors, and it was offered through private banks and wealth managers, rather than the institutional investors that normally deal in large volume transactions. There was a considerable interest from investors from all over the world, with the issuance attracting initial orders of about 190% of the offered amount. Final subscriptions were about 130% of offer at the final price for the transaction.

With the successful issuance of the debut Diaspora Bonds, Nigeria will establish a programme for raising funds from Nigerians in the Diaspora to provide an avenue for continuous participation in the development of the economy by Nigerians in the Diaspora and other friends of Nigeria.
This is good news for Diaspora Nigerians and for Nigerian people as a whole.

– Chukwu wrote in from Abuja