Nigeria’s bonds sank to near record lows in October as the finance minister failed to calm investor nerves after unintentionally implying the government may ask for a haircut on its debt.
The West African nation is considering “restructuring” its bonds and extending repayment periods, Zainab Ahmed, who has led the finance ministry in Africa’s largest economy since 2018, told Bloomberg TV on Oct.
The use of the word “restructuring” sent bonds slumping the next day, before Ahmed clarified that all Nigeria wanted to do was extend maturities, buy-back debt and that Eurobond holders would not be affected.
But it was too little, too late and the fledging rebound in bonds quickly turned back into a rout amid a skittish global market.
Bonds due in 2032 fell to 60.20 cents on the dollar Friday from 66.15 cents before Ahmed made the original comments.
“It is a case of the damage being done and too late to reverse,” said Richard Segal, a London-based research analyst at Ambrosia Capital.
“Many will conclude that mentioning this possibility at all suggests debt management conditions are worse than previously thought.”
The extra risk premium investors demand for holding Nigerian debt has risen 92 basis points to 1,058 since Ahmed’s interview, according to a JPMorgan index. Anything above 1,000 points is considered as distressed.
Meanwhile, the country’s credit default swaps have jumped well above 1,000 points from 989.72 points.
On Friday, Moody’s Investors Service slashed the Nigeria’s rating deeper into junk and placed the country in review for another downgrade, citing weaker government finances worsened by a senseless fuel s7bsidy regime..
It’s easy to see why investors are concerned, with debt service costs consuming 83% of available fiscal revenue as of August.
What’s more, Bank of America forecasts the central bank will have to devalue the naira official rate by 20% next year, increasing the cost of repayments.
Neither is pressure set to ease. The government plans to borrow 8.8 trillion naira ($20 billion) in both the domestic and international markets in 2023 to plug a budget shortfall estimated at about 4.8% of gross domestic product, higher than a legal threshold of 3% stipulated in Nigeria’s fiscal responsibility law.
The nation’s debt stock stands at just 23% of gross domestic product, but is set to jump to 35% of GDP next year after the debt management office disclosed that it has received presidential approval to convert 20 trillion naira of central bank loans to 40-year bonds that would yield 9% annually.
The World Bank forecasts debt servicing costs will exceed revenues by the end of the year.
Bond markets have a history of reacting furiously to the “restructuring” lingo. In January 2019, Ali Hasan Khalil, then Lebanese caretaker finance minister floated the possibility of restructuring the country’s debt.
The country’s dollar bonds tumbled pushing yields to more than 19%. Khalil later said fiscal reform may involve rescheduling debt, not restructuring it.
Similarly, in January 2015, Belarus’s dollar bonds lost a quarter of their value in a matter of hours after President Alexander Lukashenko talked about a potential debt restructuring.
He later clarified at the same seven-hour-long press briefing that he had meant to signal a “refinancing of debt.”
“Obviously those words scare investors and should be avoided,” said Matias Montes, an analyst at EMFI Group Limited. “They can increase the perception of how risky the credit is, just because of a careless mistake.”
