Investors dump Nigeria’s Eurobond over policy uncertainties


Despite signs of returning investors’ confidence on Thursday after FGN Eurobonds issued on November 21, 2018, saw a yield drop to 10.47 from 11.08 on Wednesday, concerns are mounting among market analysts that seeming reversal of the petrol subsidy removal by the Federal Government will continue to take its toll on Nigerian stocks and Eurobonds.

Yields on Nigerian Eurobonds fell Thursday after two straight days of losses, as sentiments improved after the Nigeria National Petroleum Company Ltd (NNPCL) secured a $3 billion loan aimed at boosting the supply of dollars into the illiquid foreign exchange market.

The nation’s benchmark dollar bond due in 2047 gained 2.1 cents on Thursday to 69.49 cents on the dollar, the biggest daily jump since July, pushing the yield down to 11.34 percent. The country’s other dollar bonds also posted gains on the day.

Before the development, the Eurobonds were on a two-day losing streak, after investors feared that the likely resumption of petrol subsidy would divert some of Nigeria’s scarce dollar earnings to the unsustainable practice.

Nigeria’s Eurobonds went on the back foot on Wednesday in an extension of the previous session’s slide as the news of the government’s decision to embargo upward adjustment of petrol pump prices continued to rattle the market.

The country’s bonds, which dramatically became bellwethers among emerging-market peers after President Bola Tinubu abruptly announced an end to fuel subsidies at his presidential inauguration in late May, were until Thursday’s development the worst performers in that class.

The dollar-denominated note expiring in 2051 shed 2.4 per cent or 1.7 cents on the dollar to 68.9 cents, only managing to gain back a third of the drop at 11:45 WAT.

Eight of Africa’s biggest economy’s bonds had ranked among the 20 worst-performing in the world in London. Nigeria’s Eurobonds with 2033, as their maturity date had depreciated 10 times in less than two weeks.

On Tuesday, President Tinubu put the increase in petrol retail prices on ice for now after intimations of possible rise by marketers, notably in the commercial capital Lagos, where filling stations were already hoarding fuel and stopping sales.

“The president wishes to assure Nigerians, following the announcements by the Nigerian National Petroleum Company Limited (NNPC) just yesterday, that there will be no increase in the pump price of petroleum motor spirit anywhere in the country,” Ajuri Ngelale, presidential spokesperson, said on an emphatic note in a broadcast.

The move diverges from the recent deregulation of the downstream sector of the energy sector, the high point being the audacious removal of the subsidies, unpopular even though market-friendly.

A major drain on the government purse, the removal alongside reforms aimed at weakening the naira will help the oil-reliant economy save N21 trillion ($28 billion) in two years, the World Bank said in a report in June.

That sum is more than the combined cash needed to build three of the country’s key rail lines, including the Lagos-Kano Line ($11.3 billion), Lagos-Calabar Line ($11.2 billion) and Abuja-Itakpe-Warri Line ($3.9 billion), findings show.

Analysts are concerned that Nigeria’s dollar bonds are not likely to find the anchor that set them on a tear in June and also helped restore some measure of investor confidence any moment soon.

The seven-year audited financial reports of the Central Bank of Nigeria (CBN) covering 2016 to 2022, released last Thursday, uncovered debt obligations in the region of $13 billion to foreign creditors, most of the transactions previously unknown to the public. Factored into Nigeria’s external reserves balance, this leaves a net balance of $16.3 billion, contrary to the long-bandied figure of over $32 billion.

The country’s credit ratings, when they are next released, are set to take a hit from the audit revelation, a development that could further scare investors away from its dollar bonds.

However, checks by Business Hallmark show that Eurobonds issued on 28 November 28, 2017, yield stood at 10.80 on August 17, 2023, from 11.41 on August 16, 2023. Similarly, FGN Eurobonds issued on November 21, 2018, saw a yield at 11.23 on Thursday from 11.67 on Wednesday.

Eurobonds issued on February 16, 2017, saw its yield drop to 11.23 on Thursday from 11.62 on Wednesday. For Eurobonds issued on November 28, 2017, yield dropped to 11.34 on Thursday from 11.69 on Wednesday. FGN Eurobonds issued on November 21, 2018, saw its yield drop to 11.54 on August 17, 2023, from 11.87 on August 16, 2023.

“The gas-price freeze appears to be a temporary price stabilization measure rather than a reversal of subsidy reforms,” Razia Khan, Head of Research for Africa and the Middle East at Standard Chartered Plc, told Bloomberg:

“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.”

Patrick Curran, senior economist at Tellimer Ltd. in London said: “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.”

“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,” Curran said.

The gap between the official rate and parallel market rate has re-emerged after narrowing in the early days of the reform in June. The official rate closed stronger at N755 per dollar on Wednesday while the parallel market rate also strengthened to N910/$, bringing the gap to N155 per USD.

The NNPCL’s $3 billion loan from the Afreximbank is, however, expected to bring some relief to the naira in the short-term but investors are curious to see a more sustainable approach to boosting supply in the market.

But according to the Chief Executive Officer, Cowry Asset Management Limited, Johnson Chukwu, if the NNPCL says the funds will be used to stabilise the exchange rate, it means the agency “will avail the CBN the funds to stabilise the exchange rate. It means CBN will allocate the forex to banks to meet forex demand for invisibles. These include PTA, school fees, etc.”

Also, a professor of Capital Market at the Nasarawa State University, Uche Uwaleke, said that it was worrisome that it was the NNPCL taking out a loan instead of the CBN.

“Much as intervention in the forex market by the CBN is desirable, a more cost effective option would have been to use what is left of our external reserves as opposed to taking a loan from Afreximbank or even the IMF. Without doubt, this $3bn loan on the balance sheet of NNPCL will make the company less attractive

Uwaleke, who is also the president of the Association of Capital Market Academics of Nigeria, added, “Contracting external loans to lend to the CBN creates an erroneous impression of insolvency on the part of the CBN, which is not a healthy signal to foreign investors.”

Also commenting, the Vice Chairman of Highcap Securities Ltd, David Adonri, said, “I don’t know when NNPCL became a monetary authority with mandate to stabilise the naira. Their job is to manage petroleum industry business and not to stray into areas where they lack competence”.

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