Nigerian Bond Issue 4 times Oversubscribed but Pricing Expensive

Friday, October 01, 2021 / 06:56 AM / by FDC Ltd / Header Image Credit: Ecographics

The Federal Government of Nigeria successfully raised$4bn from the Eurobond market, surpassing its initial target of $3bn for thefirst tranche. The success of the issue is making the government considertapping the Eurobond market for more funds.

The $4bn issue was 400% oversubscribed, an indicationof heightened investor confidence and interest in the Nigerian debt instrumentand the yields for the issue were at 6.13% (7-yr tenor), 7.38% (12-yr tenor)and 8.25% (30-yr tenor). This is positive news for the government especially inthe wake of the exchange rate brouhaha and policy uncertainty which havedampened investor sentiment. Nigerian bond issue 4 times oversubscribed butpricing expensive.

Implications

The Eurobond proceeds will help to shore up theexternal reserves towards $40bn and this will help strengthen the naira at theparallel market in the short term. The downside of raising more debt however isthe risk of falling into a debt trap as the Eurobond issuance will increase thegovernment's external debt stock. As at Q2'21, Nigeria's external debt wasapproximately $36bn. The low interest rate environment globally has benefittedemerging markets who are rushing to raise funds from the international debtmarket before a tightening stance commences in advanced economies and borrowingcosts rise.

So far in 2021, Ivory Coast, Nigeria, Senegal, Ghana,Egypt and Kenya are some of the countries that have visited the Eurobondmarket. However, the catch there is that once global interest rates start toincrease, the debt service burden will rise. For instance, the US Fed hasstated that it may commence tapering in November and interest rate hikes maycommence sooner than expected. Higher interest rates will make debt repaymentmore onerous for emerging markets.

In addition, due to the positive relationship betweenhigher interest rates and the dollar, we expect an appreciation of the greenback, which will make commodities priced in the dollar more expensive topurchase by holders of other currencies. This is negative for Nigeria that iscommodity-dependent and has an imported inflation rate, which rose to 17.11% inAugust from 17.06% in July 2021. A rising imported inflation could alter theongoing decelerating inflation in Nigeria.