Nigeria’s plans to issue Eurobonds, once seen as a path to bolster government finances, have been clouded by uncertainties, according to findings by BusinessDay.
Africa’s biggest economy had been aiming to raise funds through Eurobond sales this year, according to Wale Edun, minister of finance. He revealed in January that the country may tap the Eurobond market later in the year if rates move sufficiently lower and analysts had projected the issuance to be in June.
The last time Africa’s most populous nation tapped the international debt market was in March 2022, when it raised $1.25 billion at rate of 8.375 percent through a seven-year Eurobond.
Eurobonds are dollar-denominated debt which is an important source of foreign capital used for development finance. This issuance can serve as a succour for the country’s volatile currency and uncertainties like silence from the fiscal side, poor reserves, low oil production others could cause damage to the credibility of the Nigerian economy.
Olaolu Boboye, lead economist at CardinalStone said that the government is torn between two options. “The first is, either to focus on the dollar-denominated domestic debt that they want to issue or Eurobonds directly,” he said.
The trajectory of the naira, which has been volatile since it was floated in June last year, is still in price discovery mode. It was devalued by over 190 percent to N1470/$ currently from N460/$ June last year.
A month-long rally into April that saw the naira emerge as the world’s best currency globally fizzled in May, with the currency tumbling to one of the world’s worst performers. Now Foreign investors are sitting on the sidelines until the naira stabilises. Fitch and RMB have recently projected that the naira will end the year at N1,450 per dollar.
Analysts have said that issuance of the proposed domestic dollar bonds by the finance minister could put further pressure on the naira and change the entire dynamics of the Nigerian fixed-income market.
“The problem is that unless something is done about the structure, these USD-denominated bonds could result in another demand pressure for the USD (as everyone seeks dollars to invest in the USD bonds),” he said
He said that the issuance can become counterintuitive. “I need the policymakers to do some work, we need concrete fundamental improvements.”
Read also: DMO says no approvals yet to issue Eurobonds
Boboye said the government is waiting for markets to become more favourable to issue Eurobonds, and that can stimulate foreign influence into the economy.
Emerging economies like Nigeria looked forward to spike in inflows into their countries upon rate cut by the US Federal Reserve in June, but a slew of hotter-than-expected economic data dashed these hopes of the cutting rates in June after hiking them aggressively over the past two years. The interest rates paid for any bond issued now will definitely be significantly high.
This has made the timeline of the Eurobond issuance unknown, Boboye said “We don’t know when they will issue.”
But there is now growing speculation that the Fed will start reducing interest rates from the September meeting. Market expectations for the Fed to cut rates strengthened after the weaker-than-expected US Purchasing Managers Index report for May indicated a growth outlook.
Boboye said the Eurobond market just like every capital market is driven by happenings in the fiscal space. “Investors interested in Eurobonds are interested in knowing if the government is making enough money to pay the currency debt.”
This is important as the country’s major source of revenue, oil, is currently bleak despite elevated global oil prices due to weak oil production. Nigeria oil production has also failed to meet OPEC’s quota of 1.5 million barrels per day and the production target set of 1.78 mbpd by the federal government.
From a production level of 1,426,574 bpd in January 2024, Nigeria saw a continuous decline monthly until April. However, the figures are still below target due to oil theft and high cost of production.
The continued decline in the country’s foreign exchange reserves followed low revenue from crude oil sales and increased demand for FX, among other factors.
Data from the Central Bank of Nigeria (CBN) showed that foreign reserves, the stock of foreign assets held by the apex bank, shed by 6.69 percent in one year to $32.7 billion as of May 2024 from $35.1 billion a year earlier.
While the CBN has ticked off nearly all items on its long-awaited monetary policy reform list such as hike in interest rate and others a lot of expectation is on the fiscal side to chart a much-needed path to long-term and more sustainable dollar inflows such as the Eurobond issuance.
There’s been lots of silence on the fiscal side to walk the talk of plans to boost oil, non-oil exports and generally increase revenue.
According to the IMF in its April fiscal monitor report, in April Nigeria’s government debt-to-GDP ratio is expected to rise to 46.6 percent in 2024 from 46.3 percent in 2023, while the debt-service burden amounts to around 56 percent of tax revenues.
He said that however the IMF sustainability analysis, which identifies the amount of debt relief needed, still indicates that Nigeria is at no risk of default, given that average debt maturity is at most 9 years. Furthermore, credit rating may have improved in recent months, with a bit of a positive outlook, a consequence of the positive disposition to the reforms initiated by the government.
Boboye said that the fiscal side working, “but they still have to do more by all means in terms of strengthening the fiscal side of things, especially to support what the CBN is doing.
However, Taiwo Oyedele, chairman of the Presidential Committee on Fiscal and Tax Policy reforms, has proposed five executive orders to accelerate fiscal reforms and revive Nigeria’s economy.
This includes measures to curb inflation and foster price stability, such as suspending import duty and VAT on specified items, allowing millers to import paddy rice, pegging the exchange rate for import duty at N800, prioritising productive spending, and paying down accumulated ways and means.
A second order aims to generate employment by providing relief for wage awards, subsidising transport for low-income staff.
It also intends to boost non-oil exports and international trade, through exemptions for repatriated export proceeds of services and intellectual property, zero-rated VAT for all non-oil exports, among others listed in the report.
It requires MDAs to remit operating surpluses above N5 billion, bans foreign trips for events targeted at Nigerians, mandates electronic payment of estacode, and others to ensure prudent financial management and fiscal sustainability.
The final proposed order focuses on tax information consolidation and collaboration, mandating the use of NIN and RC numbers, and establishing a national tax data governance framework.
As though the above indicators aren’t enough to plunge investors confidence, the National Assembly proposed review of the Central Bank of Nigeria (CBN) Act 2007 which threatens to undermine the autonomy of the apex bank, dilute its policies, and contravene the global standard of an independent central bank.
However, the Senate has dismissed claims that it intends to take over the CBN’s authority on interest rate decisions. It said that the proposed amendment bill aims to establish a Coordinating Committee to align fiscal and monetary policies, not to undermine the CBN’s Monetary Policy Committee (MPC).
