Nigeria eurobonds lead emerging market losses for second day

Nigeria’s eurobonds were the worst performers in emerging-market credit for a second day on Wednesday, after the government said it will suspend increases to gasoline prices even against the backdrop of rising crude.

Eight Nigerian bonds in Bloomberg’s EM Sovereign Total Return Index featured among the 20 worst performers globally as of 9:45 a.m. in London. Notes due Sept. 2033 were down 1.1 cents on the dollar to 75.19, the lowest since June. The 2033 bonds have lost value for 10 of the past 13 days.

A $1 billion tranche of notes maturing in January 2031 fell 1.09 cents to 84.79 cents. That’s a further drop from yesterday, when it suffered the biggest drop since March. The bond has been falling for four consecutive days in its longest losing streak since April. Prices on debt due in 2032, 2033, and 2051 also fell by at least 1 cent in early morning trade on Wednesday.

Nigeria’s bonds had been on a tear through June after the election of President Bola Tinubu, whose early initiatives pleased investors and boosted confidence in the nation’s economic outlook. Some of his first actions included removing the costly fuel subsidy, replacing the central bank governor, and revamping a complex regime of multiple exchange rates.

“After rallying sharply on the back of Tinubu’s ambitious reform shift, the reality has set in that the next stage of reforms is likely to be much more difficult,” Patrick Curran, senior economist at Tellimer Ltd. in London, told Bloomberg on Tuesday. “The FX liberalization process has hit a bump in the road with an overly loose monetary policy stance, continued monetization of the budget deficit and re-emergence of a large parallel-market premium.”

While Tinubu’s initiatives led to a rally in Nigerian stocks and bonds, labor unions protested the consequent sharp increase in cost of living as inflation spiked to a fresh 18-year high. Tinubu announced on Tuesday that the government was suspending raising gasoline prices in a bid to slow inflation, which clocked in at 24.1% in July, according to data published Tuesday.

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Many analysts now believe Tinubu had not fully thought through the implications of his desire for a deregulated foreign exchange regime before embarking on what may now turn out to be an adventure for which the market will punish him. Rating agencies will have a dim view of Tinubu’s policy summersaults and speculators will attempt to further attach the local currency.

Independent petroleum marketers have been agitating for further increases in prices due to the rise in crude costs and continuing weakening of the naira. Crude prices have jumped by about 13% since mid-June, while the naira has crashed, losing about 40% of its value against the dollar in the biggest decline worldwide over that period.

The gas-price freeze appears to be a temporary price stabilization measure rather than a reversal of subsidy reforms, said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Plc in London.

“Should this turn out to be a more permanent reversal of fuel-subsidy reforms, however, then that would be a clear credit negative, as Nigeria cannot afford the fuel subsidy in any meaningful way.”