Forex instability dents Nigeria’s global bond ambitions

Nigeria’s plan to tap international debt markets will flounder until its central bank eases its grip on the country’s foreign exchange market, say bond investors who met the country’s finance minister this week.

Kemi Adeosun has repeatedly vowed that Africa’s largest economy will issue new bonds as the oil price rout of the past two years strains its public finances.

However, investors who met Ms Adeosun in London this week say that Nigeria will remain a “tough sell” unless the government changes its response to the worst crisis in decades.

Nigeria’s capital controls and resistance to allowing its currency to weaken, a path taken by other oil producers, including Russia and Mexico, has all but halted the flow of capital into the west African country.

The country will struggle to attract overseas capital until the central bank loosens capital controls and follows through on its recent promise to adopt a flexible exchange rate regime, analysts say.

Although investors were impressed by Ms Adeosun’s presentation detailing the government’s efforts to increase non-oil revenues and cut waste in the public sector, they made clear that they will not bite on an international bond until the changes to monetary policy are made.

Two weeks ago, central bank governor Godwin Emefiele declared plans to make the foreign exchange market more flexible would be introduced in the “coming days”, but adjustments have yet to be announced.

 

No one is willing to “buy Nigeria” until the central bank addresses the unorthodox policies introduced last year in response to falling oil prices, said Kevin Daly, portfolio manager at Aberdeen Asset Management in London.

 

“They didn’t give any specific details or timing on that”, said Mr Daly. When asked when to expect this adjustment — “in days, weeks, or months?”— the minister replied “in days or weeks,” the investor added.

 

Nigeria last sold dollar-denominated bonds in mid-2013, raising $1bn of five- and 10-year debt. Capital controls have curbed foreign investment in the intervening period, contributing to a sell-off that pushed the yield on 2023 bonds above 9 per cent at the start of the year.

Since then, a rebound in oil prices, diminishing concerns over the Chinese economy and waning expectations of a near-term interest rate rise in the US have led to a rally that pushed the yield back down to 7.42 per cent, although Nigeria retains one of the highest bond yields in emerging markets. It has raised the possibility of dollar and Chinese-currency bonds as part of fundraising plans this year.

Investors said Ms Adeosun, a former investment banker, said they got the impression the country intended to secure loans from the World Bank and the African Development Bank before tapping international markets in the third quarter of the year.

 

However Mark Baker, investment director at Standard Life, who attended meetings with the minister, countered that he did not expect Nigeria to make a comeback to capital markets this year without a change in direction on monetary policy.

The oil-dependent economy, which was until recently Africa’s top crude producer, has suffered additional setbacks from militant attacks in recent months that have knocked production down to its lowest level in two decades.

“They are still in denial about macro adjustment to lower oil prices and the current policy environment is not sustainable,” said Jan Dehn at Ashmore. “They conceded that FX may have to move, but have done nothing so far.”