Dollar boost and Nigeria’s Eurobond, T-bill, FGN bond, equity markets

ANALYST INSIGHT: CORONATION A.M.

Penultimate week it was reported that the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, had announced an expected inflow of $10.0 billion to Nigeria in a matter of weeks. A news story later in the week reported that a loan of some $7.0 billion was being prepared for Nigeria LNG Limited (a state-owned liquefied natural gas producer), likewise a $3.0 billion loan for the Nigerian National Petroleum Corporation (NNPC Limited, which is also state-owned)

What is the likely impact on Nigerian [financial] markets? The Eurobond market reacted positively last [penultimate] week, with spreads on Federal Government of Nigeria (FGN) US dollar Eurobonds tightening. Currency markets responded marginally, with mild appreciation of the Naira in both the official NAFEM market and the parallel market. By contrast, Naira-denominated markets, namely the T-bill, FGN bond and the equity markets, appear to have been unaffected. 

Indeed, there are no straightforward implications for Naira-denominated government debt markets from the – reportedly imminent – arrival of $10.0 billion at the Central Bank of Nigeria (CBN), in our view. This may seem strange. Surely a strengthening of the nation’s finance implies a reduction in government borrowing in its own currency? The problem is that the market understands the US dollar inflows to be earmarked for settling outstanding US dollar obligations and for settling US dollars with a long queue of businesses (such as foreign-owned airlines, shipping companies and investors) that want to repatriate funds.

We also put a question mark over the reaction of the FGN Eurobond market. After all, the price of a Eurobond is the value of the future discounted US dollar cash flows that will service it. What benefit is there if a large part of those future cash flows turn up in one go? Does it change anything, other than adding the lenders of those dollars to the nation’s obligations? Surely not. The Eurobond market’s reaction was deeply illogical, we believe. Fortunately, we think that, regardless of last week’s announcements, FGN Eurobonds represent good value, so there is no need to change our view. 

The most important market is, of course, the foreign exchange market. Here it is noticeable that the parallel market did not appreciate very much after the announcement (which was at the Nigeria Economic Summit [two] week[s] ago). The key question, and one that is very difficult to answer, is whether the arrival of a large sum of US dollars – and we cannot be sure exactly how much it will be – will satisfy all the various US dollar obligations and backlog in US dollar demand. If it does, then we could see a spectacular appreciation in the parallel rate. Watch this space.