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Nigeria’s Eurobond hit after finance minister’s debt revamp comment

Nigeria’s Eurobond takes a battering after Finance minister says debt to be restructured

Nigeria’s Eurobonds traded at a steeper discount Thursday after the market was spooked by comments by Finance Minister Zainab Ahmed, who said Africa’s most populous nation was contemplating rescheduling its mounting debt and that advisers have already been appointed for this purpose.

The comments, which she made on the sidelines of the International Monetary Fund (IMF)/World Bank meetings holding in Washington, are being interpreted by bond traders to mean that Nigeria is beginning to struggle with meeting its debt obligations at a time the minister also said the government of outgoing President Muhammadu Buhari will seek to issue fresh bonds next year if rates were to permit.

“For the larger portfolio of debt, we have just appointed a consultant” to assess how the government can “get additional relief by way of restructuring and negotiating to stretch out the repayments to longer periods,” Ahmed said Wednesday without providing further details.

Discounts on Nigeria’s Eurobond surged by up to three percentage points when the markets opened Thursday following the minister’s comments, which came years after the government had been insisting that Nigeria did not have a severe debt crisis.

Nigerian Eurobonds maturing in 2047 fell below 56 cents on the dollar by 2.55 p.m. in London, down from 58.37 cents on Tuesday, while debt maturing in 2049 and 2051 also declined.

One bond trader in London who did not want to have his name published said: “The minister may have done this to enhance transparency on Nigeria’s fiscal crisis but it would appear that the timing was wrong.

“The minister should have been saying things like we are working to export more oil by re-streaming our export pipelines and terminals while also aiming to end fuel subsidies to improve our fiscal position. Instead, she gave the impression that those holding Nigerian bonds have something terrible to worry about.”

Another analyst told BusinessDay, “The principle of debt is that you never deliberately shake the confidence of your creditors. They will punish you. When you speak of restructuring, creditors will tell you to enter into an IMF programme.”

The process of restructuring Nigeria’s external debt could take up to six months and analysts are wondering why the government chose to announce such a high impact plan at a time it is well on its way out.

The analysts who spoke to BusinessDay from London said Nigeria’s case is not as bad as the market is treating it.

“Even with Nigeria’s foreign reserves falling, the country is in a much better place than Ghana. Assuming you discount $12 billion from this reserve, the net position still places Nigeria in a far better position. The problem is that the government is just doing the wrong things,” one analyst said.

As Nigeria approaches the February 2023 election, some bond holders were already thinking that this was a good time to buy more as they bank on the hope that the incoming administration will run the economy better than it has been managed in the last eight years. This comment by the finance minister has dampened that optimism needlessly, the analysts say.

A nation is forced to refinance its debt when it has over-borrowed and its earnings are no longer enough to cope with repaying the debt. A refinancing simply means pushing the can down the road so that maturities are spread well into the future. In the process, Nigeria may have to go to the IMF for a deal, according to many analysts.

The government also plans to refinance domestic debt obligations that are due this year and next, while the country’s N20 trillion ($45.4 billion) in outstanding borrowings from the central bank will be bundled into government bonds, Ahmed said in a Bloomberg TV interview.

The move to restructure the country’s debts should ordinarily increase the fiscal space necessary to deliver on the government’s priorities in the remainder of the time it has left, Joachim MacEbong, senior governance analyst at Stears Insights said. “However, the rate of debt accumulation must reduce so as not to handicap the next administration.”

Lawmakers have approved the government’s plan to borrow as much as N8.4 trillion to plug part of the shortfall — an estimated N10.78 trillion or 4.8 percent of gross domestic product.

“The budget is designed for us to raise financing 50 percent from domestic and 50 percent from the international financing and this will be a combination of concessionary sources and bilateral sources as well as the international capital market,” Ahmed said.

Nigeria will only consider a Eurobond issuance if yields move to levels close to where they were when it last tapped international markets, “with a little markup,” Ahmed said.

Nigeria sold a seven-year bond in March at a yield of 8.375 percent, far higher than a similar maturity it raised eight months earlier at 6.125 percent. It later shelved plans to borrow another $950 million in May after yields on outstanding bonds spiked to mid-double digits.

“As it is right now, it’s too expensive for us to borrow from the international capital market,” Ahmed said.