Finance Minister storms London in search of bond investors

Posted by News Express | 6 June 2016 | 1,705 times

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Nigeria is looking 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 has 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 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-July 2013, when it raised $1 billion of five- and 10-year debt. Yields on its $500 million of securities maturing in July 2023 fell one basis point to 7.52 percent by 8:03 a.m. in London on Monday. They’ve dropped 1.16 percentage points this year, meaning the bonds have gained 8.3 percent, 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 it 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 43 percent to 285.5 in three months and to 328 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.

‘Dramatic Slowdown’

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.

Revenue Targets

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, 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. Tapping it will be tougher without a change in currency policy, according to Exotix Partners LLP.

“Under the current policy mix, those figures are unlikely to be achieved,” Alan Cameron, an economist at Exotix in London, said by phone on May 31. “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.”

•Adapted from a Bloomberg report. Photo shows Kemi Adeosun.

Source: News Express

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