Investors Rush to Nigeria as Yield on FGN Bond Falls

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Nume Ekeghe with agency report

Nigeria’s early move to tap cheap loans has improved its risk perception among foreign investors, leading to a fall in the country’s borrowing costs.

Yields on Nigeria’s dollar bonds maturing in 2047 fell from an all-time high of 13.2 per cent on March 19 to 9.1 per cent on Wednesday.

According to Bloomberg, Africa’s largest economy has lined up ambitious borrowing plans in its domestic bond market and has secured $3.4 billion from the International Monetary Fund.

It expects $3.5 billion from other lenders and has used the collapse in oil prices to scrap fuel subsidies that cost the country at least $2 billion a year.

Support from the IMF and the other development institutions, along with a nascent recovery in oil prices has boosted investor confidence, London-based head of emerging-market sovereign debt at Aberdeen Standard Investments, Edwin Gutierrez, said.

“Nigeria has been an outperformer of other sub-Saharan African credits during that time,” Gutierrez said.

Still, this doesn’t reduce Nigeria’s underlying weak fundamentals given the wide deficit and low foreign-exchange reserve buffers amidst low oil prices, the director and head of macroeconomic analysis at EFG-Hermes, Mohamed Abou Basha added.

Africa’s largest crude producer, which relies on sales from the commodity for about half of government revenue, projects that its oil earnings will drop by at least 80 per cent this year.

The deficit could widen to 6.8 per cent of gross domestic product from 4.8 per cent in 2019, according to the IMF, and unless Nigeria gets a waiver from creditors, interest payments could eat up 96 per cent of the federal government’s revenue, up from 58 per cent in 2019.

“If secured, multilateral loans would cover around 21 per cent of the general government deficit in 2020,” Fitch Ratings a recent report.

Yet investors seem unconcerned. The cost of protecting Nigeria’s debt against default has dropped by 520 basis points since March 18, an indication that creditors are feeling more secure holding the country’s debt.

Risks have also receded in the past few weeks after the IMF disbursed its loan to Nigeria. Despite the country’s public debt set to rise to 34.8% of GDP this year, from 29.1% in 2019, according to the IMF, it’s a relatively low level when compared with most emerging markets.

In a report last month, the IMF said it believes Nigeria’s debt is sustainable and there is adequate capacity to repay the fund.

“Nigerian authorities have done well to take the IMF loan, to unify the exchange rate and to suggest that the fuel subsidy is gone forever,” Renaissance capital analyst Charles Robertson said in a briefing last week. “That is an improvement for Nigeria” in the medium term, he said.