Nigerian Bond Issue 4 times Oversubscribed but Pricing Expensive

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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 the first tranche. The success of the issue is making the government consider tapping the Eurobond market for more funds.

 

The $4bn issue was 400% oversubscribed, an indication of heightened investor confidence and interest in the Nigerian debt instrument and 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 in the wake of the exchange rate brouhaha and policy uncertainty which have dampened investor sentiment. Nigerian bond issue 4 times oversubscribed but pricing expensive.


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Implications

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

 

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

 

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


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