Analysts Allay Fears of Nigeria’s Default as Eurobond Investors Fret

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•Zambia’s failure to honour coupon payment triggers concerns

Obinna Chima

Analysts have allayed concerns about the likelihood of Nigeria defaulting on its Eurobond payments to investors even as investors in the debt instrument issued by African countries have adopted cautious trading.

The assurance came against the backdrop of the announcement last Friday by Zambia that it would not pay an overdue Eurobond coupon after a 30-day grace period elapsed.

Zambia failed to pay a $42.5 million coupon on one 2024 dollar-denominated sovereign bonds that was due last month. As a result of this, the Zambian government had requested that bondholders deferred interest payments until April as it struggles to secure funding from the International Monetary Fund (IMF) as well as debt relief from other creditors. But the creditors rejected the Zambian government’s request.

ZAMBIA 2024 and 2022 Eurobonds were the worst performing instruments in the continent last week as their yields climbed 0.5 per cent and 1.2 per cent week-on-week respectively.
But speaking in an interview with THISDAY, Head of Research at United Capital, Mr. Wale Olusi, allayed fears of a likely default by Nigeria, stressing that the Zambian case was peculiar.

“For the case of Nigeria, of course, oil prices are down, but the country still has enough oil reserves. Nigeria is still getting inflows from oil proceeds, even though we are below the budgeted benchmark. We have taken the IMF loan and the Central Bank of Nigeria is managing the forex situation effectively, even though there might be divided opinion about this.

“Also, Nigeria’s external reserves are currently at about $35 billion. In terms of the local economy, Nigeria has increased Value Added Tax and the inflow of that has been encouraging. Apart from that, the yield environment has been significantly low and the biggest beneficiary from that is the federal government, which has been able to save some amount of money in terms of debt service. Yes, the concerns about default are tenable, but I don’t see Nigeria defaulting,” he stated.

The Head of Research, Greenwich Merchant Bank, Mr. Ayodeji Ebo, who noted that the development with the Zambia Eurobond could send panic among investors, however, said it shouldn’t be a source of concern to Nigeria’s bondholders.

“In Nigeria, our oil revenue can still settle that debt obligation and I don’t see it as a major problem. But it sends a signal that people would be more cautious going into African bonds,” he said.

The Acting Managing Director at Afrinvest Asset Management Limited, Mr. Christopher Omoh, noted that even though Nigeria’s situation is different from that of Zambia “because of what has happened with the Zambia Eurobond, there is a scare for African Eurobond. But despite what is going on, people are still investing. Some are still buying Angola bonds, South African bonds, which are also well, but everyone is cautious.”

An asset manager, Mr. Ola Belgore, explained that wherever there is a default, it frightens investors.

He said: “Every bad news has a ripple effect on the market generally, and when you are talking about fixed income, most people assume that if it is a sovereign instrument, the likelihood of default will not be there. But as we have seen, not only in this case with Zambia but also with Greece a few years back, there is no security, whether sovereign or otherwise that is 100 per cent secured.

“But the bigger challenge will be if the country (Zambia) cancels the principal of its 2022 Eurobond when it matures.

“However, if they are able to show some seriousness, they may have some debt forgiveness from the IMF, which can be a relief for them.”

The Executive Chairman, Federal Inland Revenue Service, Mr. Muhammad Nami, at the weekend had reiterated that Nigeria’s tax-to-Gross-Domestic-Product (GDP) ratio was currently about six per cent, compared to Egypt at 15 per cent, Ghana and Kenya at 17 per cent, and South Africa at 28 per cent.

The World Bank recommends a minimum of 15 per cent tax-to-GDP ratio for economic growth and poverty reduction, he stated.

Nami stated, “A Debt Management Office (DMO) report indicates that about N1.21 trillion was used to service debt from January to June 2020.

“Over N3 trillion is proposed for debt servicing in 2021. The report further projects that Nigeria’s debt stock will grow significantly by end of 2020.

“God forbid that Nigeria should default in debt repayment obligations. Nigeria’s debt-to-revenue ratio is worsening – it is estimated at 538 per cent at the end of the fourth quarter, which is a 190 per cent increase from 2019 figure (348%).”