External trade: More eurobond issuance on the way

Nigeria’s inclusion in JPM organ’s emerging markets bond indices for eurobonds is not affected by its exclusion from the index series for Federal Government of Nigeria (FGN) bonds, and with good reason. Eurobonds are broadly traded on the sovereign’s external balance sheet, whereas the FGN exclusion was driven by the Central Bank of Nigeria’s foreign exchange measures and policies. The external story is easier to sell, because the indicators are more favourable.

Current Picture

The environment of still low international interest rates has been positive, but the four Nigerian sovereign eurobonds – maturities from July 2018 to February 2032 – are trading well within their issue level. Its 15-year paper, issued in February 2017, is currently trading at 6.55%, more than 120 basis points inside its launch level. FGN external debt at end-June totalled $15.1bn, or 3.8% of 2016 GDP. Total FGN debt, including the larger, domestic element, was the equivalent of 15.7%. The external debt was 66%, due to the World Bank, the African Development Bank and other multilateral agencies, and therefore contracted at concessional, submarket rates. This positive becomes clearer when we see that the 2017 budget allocates N1.5trn ($5.3bn) and N176bn ($622m) to domestic and external debt service, respectively, though the FGN debt stock split at end-June was 72:28. The total is a quarter of all spending projected this year, but the budget has a large deficit and the bill for debt service represents 36% of projected revenue. In the face of these debt metrics, the FGN has launched a debt restructuring proposal to refinance Treasury bills with US dollar-denominated bonds of up to three years’ maturity within a ceiling of $3bn. The proposal is subject to the approval of the National Assembly, which, we trust, will be forthcoming.

The FGN’s game plan is to push out the average maturity and lessen the interest cost of its debt obligations. This is textbook policy in line with the strategy of its Debt Management Office (DMO), but also timely given the depressed economy in view of weak oil prices since mid-2014. The FGN’s idea is to buy itself a little time as the economy adjusts to the oil price and responds to the official policy of diversification away from oil, through import substitution and backward integration.

Return To Market

Investors in US dollar-denominated Nigerian debt should have more buying opportunities as a result, not just because of the proposal, but also because of the DMO’s plans to return to the eurobond market later this year. We understand that the $1.5bn raised in February 2017 has been allocated for financing of the 2016 budget, which was still in force at the time. The DMO may look to raise $3bn for the 2017 budget. The public external debt indicators are positive, and the private sector has been restrained: the outstanding value of corporate eurobonds is just $4.1bn. The $31bn-plus cushion of gross official reserves is ample, providing import cover of more than eight months of goods and services. This amounts to a healthy external balance sheet, underpinning sovereign credit ratings of “B+” and “B” for long-term foreign currency obligations. This means that Nigeria is less vulnerable to monetary tightening in the US than many other sovereigns. The narrative is positive, and, furthermore, the market is receptive to emerging and frontier market eurobond issues with yield. In August 2017 Iraq’s offer of six-year US dollar paper without US government guarantees was more than seven times oversubscribed. The coupon for the $1bn bonds was fixed at 6.75%, rather than the initial expectation of more than 7%. Iraq is rated “B-”.

Investors moved substantially down the credit curve in mid-September 2017 when they bought Tajikistan’s 10-year eurobond issue for $500m with a coupon of 7.125%, rather than the initial indication of 8%. This is essentially an economy based upon remittances, which is why the DMO is looking to return promptly to the international capital markets. No transaction comes without risks attached, however. The greatest in Nigeria’s case is a further downturn in its oil sector.