Nigeria’s oversized debt has entered the range of junk after the extra risk premium which investors demand for holding the debt of Africa’s most populous nation rose above one thousand basis points, according to JPMorgan index.
The JPMorgan index categorises a debt as distressed once the extra risk premium demanded rises above 1000 basis points.
A Bloomberg report said the premium has touched 1052, an increase of 92 basis points since Finance Minister Zainab Ahmed committed the gaff in an interview she gave on the sidelines of the recent IMF/World Bank meetings in Washington and in which she said Nigeria had appointed advisers opening the way for a debt restructuring.
Last week, Nigeria’s bonds sank to near record lows 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, Ahmed, who has led the finance ministry.
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 a record 59.41 cents on the dollar Friday before rebounding to 60.448 cents in early trade on Monday. That compares to 66.15 cents on Oct. 11 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.”
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There are other signs indicating the vastly reduced appetite of investors for Nigeria’s debt. The five-year credit default swaps jumped to 1,137.54 points on Friday, the highest since April 2020, from 989.72 points on Oct. 12.
This happened after Moody’s Investors Service slashed the nation’s rating deeper into junk and placed the country in review for another downgrade, citing weaker government finances.
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 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.”
