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Eurobond and The Headache of Pricing Sovereign Instruments

Proshare

Tuesday, November 21, 2017 12:48PM /Proshare Research 

On Monday, the Nigerian Government issued a $3billion Eurobond which was oversubscribed by $ 11 billion.  Pricing the 1o-year and 30-year debt instruments issued   at 6.5% and 7.25% respectively. 

The Monday scenario once again validated strong appetite for offshore Nigerian sovereign debt instruments even though the investment is not entirely risk free given the nature of the Republic’s export injection pool as vulnerable to cyclical shocks. 

Many argued that Nigeria priced itself excessively to the roof, therefore, the high rate was responsible for the huge demand witnessed on the sovereign debt instrument.  

Most importantly, the 10 year debt instrument is considered to be a leading  indicator; the rates on the 10 year captured the health of the economy. As risk premium on the 10-year definitely match the economic reality at that point in time. In the light of the on-going macro picture where rates on the Eurobond  10-year  excessively price to the roof  in order to  attract  such patronage. 

Fig 1
:   Rate on  the 10-Year Notes Across Selective Countries 

Countries

10-Yr (%)

Inflation (%)

United states

2.32

2

Japan

0.04

0.7

Germany

0.36

1.6

France

0.71

1.1

Britain

1.29

3

Spain

1.56

1.6

Italy

1.83

1

Canada

1.94

1.4

Australia

2.54

1.8

India

6.91

3.58

Indonesia

6.68

3.58

china

3.97

1.9

Russia

7.67

2.7

Brazil

10.18

2.7

Indonesia

6.68

3.58

Portugal

1.99

1.4

Chile

4.51

1.9

Source: Trading Economy 

Key Takeaways

·         Relatively, the shrink in our risk premium   from 7% to 6% compared to the previous year was due to improvement in both oil prices and productivity in the oil sector. Certainly, exchange rate risk earlier experienced a year ago has rubbed off allowing rates on foreign denominated debts to fall.

·        
Our exports are highly concentrated with oil making 92% of it, regardless the slight improvement in oil price will hold just on the short as external risk has not rubbed off completely

·        
Countries like the United States of America, Germany and France have more diversified export, deeper money market, low interest rate and low inflation. They are in a better state to access funds from the capital market compared to Nigeria which has high inflation and the Republic’s external revenue is vulnerable to shocks.

·        
 The gulf in risk premium is inevitable when you compare Nigeria’s inflation of 15.91% to the likes of the United States of America and Chile, with inflation standing at 2% and 1.9% respectively.

·        
  Countries like Indonesia  that has inflation at 3.58%   coupled with  stronger macro compared to Nigeria 6.5% could be considered as a good deal for Nigeria. 

·        
Even though inflation is low in Brazil, but the high debt to GDP, feeble credit rating as most of the nation’s sovereign debt is tagged as speculative and the present political uncertainty makes it an exception.

·        
Countries like Chile which are emerging economies have low inflation, more diversified export with a higher export to GDP ratio compared to Nigeria which have lower yield on its 10-year notes.
 

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