Buhari May Succumb To Eurobond Lure As Yields Plummet

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By Paul Wallace
A rally that drove yields on Nigerian Eurobonds to six-month lows has created an opportunity for President-elect Muhammadu Buhari to tap international markets soon after he is sworn in on May 29.
Rates on Nigeria’s $500 million of securities due July 2023 fell to 5.45 percent this month, the lowest since Nov. 4. Yields have dropped by more than 300 basis points since reaching a record high of 7.83 percent on Feb. 11. Nigerian dollar debt has returned 7 percent this year, compared with the 2.8 percent average for peers in Africa and the Middle East, according to data compiled by Bloomberg.
While incumbent President Goodluck Jonathan’s administration mostly issued local-currency bonds, a budget deficit that’s widening as low oil prices starve Africa’s biggest crude producer of cash means new sources of funding may be needed. Lower dollar yields make Eurobonds more enticing than naira debt, according to Yvonne Mhango, an economist at Renaissance Capital. The West African nation has sold Eurobonds twice, most recently in July 2013.
“Nigeria will have to pursue the external financing option more so than they’ve done previously,” Mhango said by phone from Johannesburg on May 14. “That’s because the financing gap will be much bigger than before. Also, yields have come in nicely. That’s an opportunity for them to go that route.”
Clamp-Down
Former military ruler Buhari, 72, defeated 57-year-old Jonathan in a March 28-29 vote. He pledged to clamp down on corruption and defeat Boko Haram’s Islamist insurgency in the north east when he takes over, which will mark Nigeria’s first democratic transition from one party to another.
Whether Nigeria’s debt rally continues will depend on crude prices and Buhari’s success in carrying out his pledges, including a vow to boost transparency and production in the oil industry, according to Brett Rowley, a managing director at Los Angeles-based TCW Group Inc.
“Investors hope he will make good on campaign promises to crack down on corruption and implement structural reform, particularly in the oil sector,” Rowley, who helps oversee $160 billion of assets including Nigerian Eurobonds, said by phone on May 15.
Low Debt
Nigeria would benefit from its low debt levels if it did tap international capital markets, according to Razia Khan, head of Africa economic research at Standard Chartered Plc. The ratio of debt to gross domestic product is 10.7 percent, according to Barclays. That compares with 67 percent for Ghana and 44 percent for South Africa. Foreign debt amounts to 1.7 percent of GDP, compared with 9 percent for naira-denominated borrowings, according to Barclays Plc.
“Anyone looking at Nigeria’s situation would say there’s a case for external borrowing,” Khan told reporters in Lagos, the nation’s biggest city, on May 5.
Paul Nwabuikwu, a spokesman for the finance ministry in Abuja, and Garba Shehu, a media aide for Buhari also based in the capital, didn’t immediately respond to e-mailed requests for comment.
Average yields on naira-denominated bonds dropped to 13.9 percent on May 14 from more than 16 percent in mid-March, just before the election. They are still the highest among 31 emerging markets tracked by Bloomberg. Yields on the nation’s 2023 Eurobonds climbed 5 basis points to 5.70 percent by 8:13 a.m. in Lagos.
‘Cash Crunch’
Nigeria’s government, which derives 70 percent of its revenue from oil exports, has a “cash-flow crunch” and has already borrowed more than half the amount it budgeted for the full year, Finance Minister Ngozi Okonjo-Iweala said on May 5. While spending will fall this year by 18 percent compared with 2013, the government still needs an oil price of $88 a barrel to balance its budget, Deutsche Bank AG analysts said in an e-mailed report on May 14. Brent crude fell 0.1 percent to $66.66 a barrel on May 15.
“They would pay less on a Eurobond than tapping the local market,” TCW’s Rowley said. “It would certainly be tempting for them, particularly in this lower oil-price environment. The government could use the cash.”

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