The odds are stacked against Nigeria as it looks to raise debt on the international markets for the first time in almost three years.
Finance Minister Kemi Adeosun is leading a team of officials that will meet bond investors at London’s five-star Corinthia Hotel on Tuesday at a time when Africa’s biggest economy is on the verge of a recession, oil production has fallen to about a three-decade low, and the budget deficit has swelled to a record. Yields on Nigeria’s existing dollar debt are almost twice as high as those for Kazakhstan and Colombia, two other developing-nation oil producers.
While they’re interested in plans to revive growth, investors said they will also demand to know when and how the central bank will end capital controls and a currency peg that have starved the country of dollars and slowed foreign investment to a trickle.
Tapping the offshore bond market this year is crucial for Nigeria to fund a budget of 6.1 trillion naira ($31 billion) meant to stimulate the economy, according to Rand Merchant Bank.
“They will be under immense scrutiny,” Nema Ramkhelawan-Bhana, an analyst at RMB, FirstRand Ltd.’s investment-banking unit, said from Johannesburg on June 2. The Eurobond market, which Nigeria may try to tap for as much as $1 billion, is “an avenue of financing they’re in desperate need of. It’s going to be a tough week for the finance ministry,” she said.
Nigeria has sold dollar bonds twice, the last time in mid-2013, when it raised $1 billion of five- and 10-year debt.
Yields on its $500 million of securities maturing in July 2023 fell four basis points to 7.49 percent by 12:15 p.m. in London on Monday and have dropped 1.19 percentage points this year.
Nigeria’s Eurobonds have gained 8.3 percent in 2016, compared with the average of 9.6 percent for high-yielding emerging-market sovereign dollar-debt tracked by Bloomberg.
Bond investors blame Nigeria’s rigid foreign-exchange regime for draining reserves, which have fallen to a more than 10-year low, and hindering the economy, according to Bank of America Merrill Lynch.
The second-biggest U.S. bank by assets says Nigerian Eurobonds would rally more if the government allowed the naira to weaken.
Central bank Governor Godwin Emefiele has fixed the naira at 197-199 per dollar since March 2015, even as other oil exporters from Angola to Kazakhstan have let their currencies drop.
Forward contracts suggest it will fall 39 percent to 277 in three months and to 324 in a year.
The black-market rate has plummeted to around 355 as the central bank runs out of the foreign-currency that companies need to import raw materials and equipment.
“Without some kind of exchange-rate reform, we doubt the market would look favorably upon a Eurobond,” said Alan Cameron, a London-based economist at Exotix Partners LLP.
“The government’s unwillingness to adjust is likely to be seen as a major turn-off for many investors, even if the headline debt ratios are low.”
The economy contracted for the first time since 2004 in the three months through March, and a recession is imminent, the central bank said on May 24.
“Feedback from our clients suggests that the removal of the naira peg would be a positive catalyst for the dollar bonds,” Oyin Anubi, a London-based economist at Bank of America, said in an e-mailed response to questions on June 3. “The dramatic slowdown in economic growth, combined with uncertainty on foreign exchange and risks to oil production, means that this is a difficult time to invest in Nigeria.”
The government has said it plans to raise about $10 billion of debt in 2016, half of it externally, to plug a fiscal deficit estimated at 2.2 trillion naira, or 2.1 percent of gross domestic product.
With oil revenue, which made up two-thirds of the total in 2014, having plunged along with crude prices, the government is banking on a steep rise in the tax take from other sectors.
Yet Adeosun said last week that Nigeria might fail to reach its revenue targets as the economy slows.
The budget gap may reach 4.3 percent of GDP, around double what the government is planning, according to Anubi.
All this means that while Nigeria is also trying to raise dollar debt from the World Bank and the African Development Bank, the Eurobond market has taken on added importance.
Under the current policy mix, the government’s targets “are unlikely to be achieved,” Cameron at Exotix said.
“Given the right policy mix, it’s possible. Currency reform is just the first in a range of measures that could unlock investment and boost growth.”