Nigeria risk premium hits 4-year low

The risk premium or extra yield demanded by foreign investors to hold Nigerian dollar debt is retreating as oil prices race to multi-year highs.
The country risk premium refers to the difference between the higher interest rates that less stable and riskier countries must pay to attract investors, and the interest rates of an investor’s home country.
The yield spread between the United States’ 10-year benchmark bond and Nigeria’s 2023 $500 million Eurobond shrank to 220 basis points Friday, February 2, according to data obtained from the Bloomberg terminal.
That’s the lowest in at least four years, after the spread ballooned to a high of 762 basis points February 11, 2016 in the thick of a Nigeria crisis sparked by the rout in global oil prices.
“The oil rally has softened Nigeria’s credit risk and comforted foreign investors,” Wale Okunrinboye, a fixed income and currency research analyst at Ecobank, said.
“Now is a good time for the federal government to take advantage of the favourable market pricing and raise the planned USD$2.5 billion Eurobond. It could be sold for as little as 5 percent,” Okunrinboye said from the commercial capital, Lagos.
Nigeria’s debt management office (DMO) plans to raise $2.5 billion in Eurobonds in the first quarter of 2018 to help reduce the burden from paying double-digit yields on naira bonds and to help free up cheap credit to the private sector.
The country’s 2023 $500 million Eurobond issued July 2013- the most liquid of the seven separate Eurobonds the country has sold since 2011- yielded 5.04 percent as of Friday, February 2, according to data available on the website of trading platform, FMDQ.
Meanwhile, the US 10-year Treasury yield jumped to 2.84 per cent, a line it last crossed in January 2014, effectively setting the yield spread between it and the Nigerian Eurobond at 220 basis points.
The US/Nigeria yield spread averaged 350 basis points in 2017, 500 basis points in 2016, 650 basis points in 2015 and 480 basis points in 2014, according to data compiled by BusinessDay.
This year, the spread has hovered between a high of 273 basis points on January 2 and a low of 222 basis points February 2.
Typically, the higher risk a bond or asset class carries, the higher its yield spread. When an investment is viewed as low-risk, investors do not require a large yield for tying up their cash. However, if an investment is viewed as higher risk, investors demand adequate compensation through a higher yield spread in exchange for taking on the risk of their principal declining.
“The improved macro-indices from higher oil prices to rising external reserves is rubbing off on investors risk perception of Nigeria,” Dolapo Ashiru, managing director and chief executive officer of Lagos-based Mega Capital financial services Ltd, said.
“The only way to go from here is for government to see through its much touted reforms to consolidate the gains seen in the past eight months,” Ashiru said by phone.
Oil prices have inched higher since a lengthy collapse that began mid-2014, as OPEC’s production cuts drain the supply glut which dampened prices. Although Brent crude fell 2.3 percent to USD$68 per barrel, Friday, according to Bloomberg data, it has jumped three folds from a record low USD$28 per barrel in January 2016.
Nigeria’s exemption from any cuts to its crude oil output has combined with higher prices and stability in the Niger-Delta to boost the inflow of petrodollars, boosting external reserves and calming the nerves of foreign investors.
Gross external reserves settled at a three-year high of $40.6 billion as of January 30, 2018, according to the Central bank’s data. That’s a more than 60 percent rise since foreign reserves slumped to a record low $25 billion in 2016 as oil prices declined.
The oil decline sparked foreign currency shortages that saw Nigeria fall out of favour with foreign investors and contributed to the nation’s first economic recession in a quarter of century in 2016.
Rather than allow the naira currency weaken, in line with oil prices, as Russia and Kazakhstan did, Nigeria resorted to capital controls.
The move sent foreign investors fleeing and stoked pressure on the naira, which went on to shed 40 percent of its value against the dollar last year.
The situation is however starting to look up once again for Africa’s largest oil producer, though slowly, following a fragile exit from recession in the second quarter of 2017.
Global bond markets have been unsettled this year as economic sentiment has improved and central banks started to unwind some of their post-crisis monetary stimulus.
Bonds are also dealing with expectations that the US deficit will rise due to recent tax cuts, leading to more government borrowing.
The yield on the benchmark US 10-year note, which moves inversely to prices, has climbed steadily from 2.4 per cent at the start of 2018.
The rise in the yield stoked concerns that a three-decade bull run for bonds may be over.
Corporate America is in the middle of a positive earnings season, but the pace and power of January’s stock market rally has unnerved some analysts and investors.
Despite this week’s wobble, the S&P 500 is still heading for its best start to a year since 1987.
European sovereign bonds are also taking a hit, pushing their yields higher. German 10-year bond yields are 2.2 basis points higher at 0.733 per cent. The yield touched 0.740 per cent in December 2015, and regularly traded above it last September.

Equities fell on Friday, with the Europe-wide Stoxx 600 down 0.8 per cent and a 1.1 per cent fall for Frankfurt’s Xetra Dax, after a more mixed showing in Asia.
Although the Federal Reserve held interest rates steady at its meeting on Wednesday, expectations that policymakers will tighten policy in March and perhaps move more aggressively than previously forecast later this year are rife.
Since the start of the year, yields on U.S five, seven and 10-year Treasuries have all climbed by more than 30 basis points.

 

LOLADE AKINMURELE