Investors are demanding the highest return in four years from Nigeria to be holders of its debt, a signal that the country’s borrowing spree has come to a head.
The country’s risk premium has joined the league of countries with the world’s highest including Yemen, Syria, Venezuela, Sudan, and Lebanon, according to country risk premium ratings by Moody’s Investors Service and New York University.
The extra compensation investors demand to hold Nigeria’s benchmark 10-year bond rather than the 10-year US Treasury hit 11.8 percent in April 2023, the highest since 2019, according to data compiled by BusinessDay.
“Investor’s confidence in Nigeria’s market is currently at historic lows; the next government will struggle to raise capital,” said Damilola Adewale, a fixed income and currency research analyst familiar with sub-Saharan Africa. “For Nigeria, it means any security, especially bonds issued in the international capital market, would be priced at a high rate by investors.”
The Federal Government’s 10-year bond yield opened on Monday at 14.47 percent versus the US 10-year Treasury yield, which opened at 3.36 percent.
Nigeria’s rising risk premium is one of the hurdles ahead of President-elect Bola Tinubu, who will take the helm of Africa’s biggest economy in less than 50 days.
The country had $15.6 billion in commercial dollar-denominated bonds outstanding as of December 2022, according to data from the Debt Management Office.
Its total external debt, which includes multilateral and bilateral loans from Exim Bank of China, the World Bank Group and the African Development Bank, stood at $41.69 billion in December, data seen by BusinessDay show.
“Nigeria’s high-risk premium means the government would spend more to raise external capital, and even more to service its debts,” Adewale said.
In 2022, Nigeria’s debt service-to-revenue ratio was at 80.6 percent — a figure far above the World Bank’s suggested 22.5 percent for low-income countries like Nigeria.
The International Monetary Fund had said Nigeria may spend almost 100 percent of its revenue on debt servicing by 2026.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, identified Nigeria’s downgrade by major rating agencies as the reason investors are demanding higher risk premium on Nigeria’s bond.
In the first six weeks of 2023, Moody’s downgraded the sovereign ratings of the country while Standard & Poor’s reviewed its outlook of the country to negative. The two rating agencies were concerned about the rising level of Nigeria’s debt and its ability to continue to meet its debt obligations in the future.
“Nigeria’s FX challenges over the past year have also contributed to the increase in the risk premium,” Yusuf said.
According to official data, Nigeria’s foreign direct investment (FDI) plunged to $468.91 million in 2022, the lowest in at least nine years. India received $42.5 billion in FDI during January-September 2022.
Analysts say Nigeria might not seem like a good investment destination compared to advanced countries at the moment despite its status as a frontier market with growth potentials and market accessibility.
They say the investment outlook of Africa’s biggest economy depends majorly on Tinubu, who is expected to carry out economic reforms such as currency exchange reform, fuel subsidy removal or phase-out, and boosting the economy.
“Beyond externalities like COVID-19 and the Russia-Ukraine war, the economy was not properly managed in the last eight years; investors currently perceive Nigeria in a precarious state, hence the demand for higher risk premium,” Yusuf said.
Kelvin Emmanuel, chief executive officer of Dairy Hills Limited, blames the Federal Government’s continued breach of the Fiscal Responsibility Act with unsustainable deficits as reasons for the increase in country risk premium.
“Violation of Central Bank of Nigeria Act and mismanagement of CBN overdrafts has contributed to Nigeria moving to the league of countries with the highest risk premium in the world trailing behind countries like Ukraine, El-Salvador, Maldives, Pakistan, Tunisia, Angola and Ghana,” he said.
In his government’s final budget, President Muhammadu Buhari sets out a record N10.7 trillion deficit, more than N7.35 trillion in 2022 and above the mark prescribed by the Fiscal Responsibility Act.
“An alignment of the inflation to the interest yield curve, where the Monetary Policy Committee is hiking interest rates to keep pace with accelerating inflation also contributed to an increase in Nigeria’s risk premium,” Emmanuel added.
Since the second quarter of 2022, the CBN has been hiking the benchmark interest rate as it seeks to tame rising inflation fuelled by the Russia-Ukraine war that saw a sharp rise in commodities prices. The apex bank has raised its main interest rate by 750 basis points to 18 percent.
Nigeria’s inflation rate increased to 21.91 percent in February 2023 from 21.8 percent in the prior month, the highest increase since September 2005.
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“Companies are finding it difficult to raise debt through the Eurobonds market, because of a weaker sovereign credit rating,” Emmanuel said.
BusinessDay findings showed Nigeria’s equity risk premium, which is the additional return that a reasonable investor expects to receive on an equity investment above a risk-free investment like Federal Government of Nigeria bonds, stood at 17.8 percent, the third highest in the world.
“This has an impact on the equity risk premium of the corporates that are having to grapple with a distorted FX market,” Emmanuel said.
Naira currently trades at 460 per $1 in the official market, compared to around 750/$1 on the black market.
Foreign exchange shortages faced by Nigerian companies may threaten bank liquidity, while a devaluation of the naira precipitated by these shortages would weaken banks’ capital, rating agency Moody’s said in a note on Feb. 16.
“The central bank has a strong track record of repaying the FX it owes to the banks, but at a time of acute FX shortages, there is increased risk that it would extend the life of some contracts, postponing repayment,” Moody’s said.
