Why Nigeria may buck trend of record-low interest rates on African Eurobonds

Increased investors’ appetite for African Eurobonds is spurring record low-interest rates, but Nigeria may miss out when it visits the international market later this year.

Declining external reserves, insecurity, policy inconsistency and the recent Twitter ban, which heightened the risk premium of Africa’s largest economy, are top reasons why Nigeria is unlikely to follow the trend of record low-interest rate enjoyed by its African peers.

Benin Republic, Côte d’Ivoire and Kenya, the three African countries that have visited the international market this year, issued their Eurobonds at record low-interest rates of 4.87 percent 4.30 percent and 6.3 percent, respectively.

Kenya’s Treasury Secretary, Ukur Yatani, said, “The Eurobond oversubscription was a sign of strong global investor confidence on Kenya’s economy and medium-term economic prospects.”

The same cannot be said for Nigeria whose external reserve has failed to reflect the rising crude oil price that surpassed $70 per barrel in June. Nigeria’s 2.5 percent gross domestic product (GDP) growth forecast for 2021 is nothing but undesirable when compared with Kenya’s 6.6 percent.

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Investors were already demanding higher returns from Nigeria to be holders of its debt as compensation for tolerating its high-risk environment in the first quarter of this year.

The extra compensation investors demand to hold Nigeria’s benchmark 10-year bond rather than the 10-year US Treasury hits 9.4 percent in February, from 8.9 percent in the same period last year.

That was a sign that investors’ risk perception of Nigeria had risen over that period. The trend is curious given that oil prices are rallying, analysts say.

“Nigeria could be priced at higher yields considering the international investor community’s concern,” Ayorinde Akinloye, investment research analyst at United Capital, states.

Benin Republic, the first African country to issue Eurobond in 2021, was oversubscribed by over two times. Investors placed an order for triple the $1.03 billion raised by Côte d’Ivoire, while Kenya, the most recent issuer, reported an order that was four times the $1 billion it raised from the international market.

Although a high subscription rate does not necessarily translate to a lower interest rate, it is a sign of how confident investors perceive the country’s ability to fulfil their debt obligation.

According to Yinka Ademuwagun, investment management analyst at ValuAlliance Asset Management, the recent Twitter ban in Nigeria will increase Nigeria’s risk premium as it will make foreign investors price down the bond due to the regulatory risk that comes with investing in Nigeria going forward.

Following the inverse proportion of yield and price, if analysts expect investors to price down Nigeria’s planned Eurobond, it means that investors would increase the rate they would be demanding when Nigeria issues its Eurobond.

Reuters recently quoted the director-general of the Debt Management Office (DMO), Patience Oniha, as saying the government was now planning to choose Eurobond advisers through an open bid process.

According to Oniha, the amount to be raised would be within the foreign borrowing plans for 2021.

In a letter to the Senate seeking approval for the debt raise, President Muhammadu Buhari said, “The plan is to raise the sum of $6.183 billion from a combination of sources.”

From recent trends in the international capital market (ICM), he said, it was now possible for Nigeria to raise funds in the ICM, saying, ”We estimate that Nigeria may be able to raise $3 billion or more, but not more than $6.183 billion in a combination of tenors between five to 30-years.”

“They are approaching the market anytime soon and so the timing is not favourable for Nigeria in the sense that the government’s decision to ban Twitter will affect investors’ confidence in Nigeria,” Ademuwagun says.

The Nigerian government recently banned Twitter after the social media site deleted a tweet by President Buhari that threatened secessionist groups in the southeast who were alleged to be responsible for attacks on government offices.

According to Akinloye, Nigeria’s decision to ban Twitter will send the wrong signals to foreign investors about government policy and inconsistencies, noting, “We have had issues of capital control, where investors who wanted to exit were trapped due to lack of FX.”