Nigeria bondholders are missing out on the global rally in fixed income as the African nation reels from the collapse in oil prices and a sliding currency.
Average yields on naira government debt soared 2.5 percentage points in the past three months, compared with a drop of 47 basis points for emerging-market local-currency securities, according to Bloomberg indexes. Nigerian bonds were the worst performers after Russia among 31 developing nations in the period, losing 16 percent for dollar investors.
With Nigeria dependent on crude exports for 70 percent of government revenue, the 60 percent drop in prices since last year’s peak in June has sparked investor outflows that policy makers have tried to stem by devaluing the naira and raising interest rates to a record 13 percent. With an election next month, markets are seeking assurances that officials are ready to cut spending and devalue the currency again, steps needed to revive the economy, according to Standard Bank Group Ltd.
“Are investors starting to get spooked? I think so,” Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank in Johannesburg, said by phone on Jan. 14. “The broad market weakness in Nigeria indicates there is concern.”
“Even before the oil-price collapse, there were chinks in the Nigerian state’s armor,” Ramkhelawan-Bhana said. “There were concerns about the fiscal position, and the oil price has intensified those concerns.”
Security forces are battling a six-year insurgency by Boko Haram militants. The group will escalate attacks to discredit the election and the threat from them is becoming increasingly politicized, Philippe de Pontet, head of New York-based Eurasia Group’s Africa practice, said in an e-mailed note Jan. 9.
President Goodluck Jonathan’s People’s Democratic Party will face an opposition led by former military leader Muhammadu Buhari on Feb. 14, the stiffest challenge to the PDP since it came to power at the end of the army rule in 1999. While Eurasia projects a narrow Jonathan victory, whoever loses is likely to reject the result, according to de Pontet.
The security risks are weighing on Nigeria’s debt as the Federal Reserve prepares to raise interest rates, increasing competition for investment among developing nations, according to Stephen Bailey-Smith, head of Africa strategy at Standard Bank.
Yields on naira debt due 2024 rose 198 basis points since the beginning of December to 15.31 percent yesterday, while rates on Nigeria’s $500 million of Eurobonds due in July 2023 jumped 146 basis points in the period. Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of about 1.16 percent as of yesterday, an all-time low based on data starting in 1996.
Last month, Finance Minister Ngozi Okonjo-Iweala proposed cutting the 2015 budget by 8 percent as falling crude erodes revenue. Beyond any spending cuts, Nigeria needs to further devalue the naira to maximize returns from crude exports, Bailey-Smith said by phone from London Jan. 14.
The currency’s peg was moved to 168 per dollar from 155 on Nov. 25, with its trading band widened to 5 percent either side from 3 percent. The central bank’s monetary policy committee will announce its next decision on interest rates on Jan. 20. The naira weakened 1.3 percent to 188.10 per dollar, a record low, by 12:40 p.m. in Lagos, bringing its decline in the past 12 months to 15 percent.
“If oil is structurally weak, you have to have a major policy shift to deal with that, and until you have a new government, you won’t have that,” Bailey-Smith said. “For now, I’m fairly bearish.”
Average yields on naira government debt soared 2.5 percentage points in the past three months, compared with a drop of 47 basis points for emerging-market local-currency securities, according to Bloomberg indexes. Nigerian bonds were the worst performers after Russia among 31 developing nations in the period, losing 16 percent for dollar investors.
With Nigeria dependent on crude exports for 70 percent of government revenue, the 60 percent drop in prices since last year’s peak in June has sparked investor outflows that policy makers have tried to stem by devaluing the naira and raising interest rates to a record 13 percent. With an election next month, markets are seeking assurances that officials are ready to cut spending and devalue the currency again, steps needed to revive the economy, according to Standard Bank Group Ltd.
“Are investors starting to get spooked? I think so,” Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank in Johannesburg, said by phone on Jan. 14. “The broad market weakness in Nigeria indicates there is concern.”
Election Challenge
Oil prices have dropped as U.S. crude output increased, adding to global stockpiles. The price rout may extend to $35 a barrel for the benchmark U.S. variety in the “near term” because both oil supply and demand will have a delayed reaction to falling prices, Bank of America said in a Jan. 6 report.“Even before the oil-price collapse, there were chinks in the Nigerian state’s armor,” Ramkhelawan-Bhana said. “There were concerns about the fiscal position, and the oil price has intensified those concerns.”
Security forces are battling a six-year insurgency by Boko Haram militants. The group will escalate attacks to discredit the election and the threat from them is becoming increasingly politicized, Philippe de Pontet, head of New York-based Eurasia Group’s Africa practice, said in an e-mailed note Jan. 9.
President Goodluck Jonathan’s People’s Democratic Party will face an opposition led by former military leader Muhammadu Buhari on Feb. 14, the stiffest challenge to the PDP since it came to power at the end of the army rule in 1999. While Eurasia projects a narrow Jonathan victory, whoever loses is likely to reject the result, according to de Pontet.
The security risks are weighing on Nigeria’s debt as the Federal Reserve prepares to raise interest rates, increasing competition for investment among developing nations, according to Stephen Bailey-Smith, head of Africa strategy at Standard Bank.
Yields Jump
He has an underweight recommendation on the nation’s dollar debt, which is rated three steps below investment grade at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.Yields on naira debt due 2024 rose 198 basis points since the beginning of December to 15.31 percent yesterday, while rates on Nigeria’s $500 million of Eurobonds due in July 2023 jumped 146 basis points in the period. Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of about 1.16 percent as of yesterday, an all-time low based on data starting in 1996.
Last month, Finance Minister Ngozi Okonjo-Iweala proposed cutting the 2015 budget by 8 percent as falling crude erodes revenue. Beyond any spending cuts, Nigeria needs to further devalue the naira to maximize returns from crude exports, Bailey-Smith said by phone from London Jan. 14.
The currency’s peg was moved to 168 per dollar from 155 on Nov. 25, with its trading band widened to 5 percent either side from 3 percent. The central bank’s monetary policy committee will announce its next decision on interest rates on Jan. 20. The naira weakened 1.3 percent to 188.10 per dollar, a record low, by 12:40 p.m. in Lagos, bringing its decline in the past 12 months to 15 percent.
“If oil is structurally weak, you have to have a major policy shift to deal with that, and until you have a new government, you won’t have that,” Bailey-Smith said. “For now, I’m fairly bearish.”
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