Market awaits Nigeria’s planned Eurobond as naira falls

Investors and market players have more questions than answers regarding Nigeria’s planned Eurobond issuance as authorities remain silent on the timing of the sale.

Africa’s biggest economy had been aiming to raise funds through Eurobond sales this year, according to Wale Edun, minister of finance.

Edun 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 a 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 naira which weakened against the dollar last week has been on the receiving end of the uncertainty over the planned Eurobond issuance.

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.

Boboye said the government is waiting for markets to become more favourable to issue Eurobonds.

Emerging economies like Nigeria looked forward to a 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 be significantly high, according to Boboye.

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.

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.

Boboye said that the fiscal side is 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.”

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.