If the positive feedback from international investors is anything to go by, things are beginning to look good for the Nigerian economy. The $1 billion Eurobond offer held last Thursday, the fourth since 2011, was oversubscribed by nearly 800 per cent. The cheery news was the country’s first since its economy, last year, slipped into recession, the first in almost three decades. The oversubscription surprised not a few pundits.
The offer, which comes at $200,000 denominations and multiples of $1,000 denominations, will mature on February 15, 2032, with Citigroup Global Markets Limited and Standard Chartered Bank. Stanbic IBTC Capital is the Financial Adviser.
For a country grappling with recession, the endorsement from international investors meant that things were not as bad as being projected. Many analysts had predicted that the country would be priced out of the market for the offer.
With all the indicators at the close of last year in the negative – inflation at 18.6 per cent, Gross Domestic Product (GDP) growth rate negative and naira in tatters, that the economy commanded – the confidence of global investors, explained how resilient it was.
The Federal Government had on February 9, issued $1 billion Eurobond at 7.875 per cent yield and 15-year tenor to support infrastructural developments in road, railway and power.
A currencies analyst at Ecobank Nigeria, Olakunle Ezun, said the oversubscription of the bond reflected continued confidence in the country’s economic prospects despite exchange and inflation rates challenges. He said fund managers dominated the allocation of the bond with United States (U.S) investors accounting for most of the demand.
He said: “For some of us that believe in Nigeria, people think that we are joking. Despite the inflation and exchange rate worries, Nigeria was still able to get a good bargain. It gives me the hope that the economy will soon rebound”.
Ezun said that Nigeria’s overdependence on crude oil robbed it of its many opportunities. “All we need to do is just diversify the economy from crude oil. If we had used the oil revenues efficiently, we should not be importing fuel and the savings from that alone will lift the economy speedily,” he said.
Ezun said that with an estimated 190 million population and good demographics, Nigeria remains savvy investors’ destination. “If the government had known, it would have asked for $4 billion. The economy is not as bad as people think,” he said.
Former Keystone Bank Executive Director Richard Obire, who said that the government can quickly go back to the market, advised that the funds being raised should be supported by good policy and commitment to deliver on the set targets.
According to him, the risk of investing in the country was still low, and the Organisation of Petroleum Exporting Company (OPEC) and non-OPEC countries have been co-operating to moderate the prices of crude oil. “Nigeria needs to use the money well to position the economy in the medium to long-term,” he said.
The Managing Director of Afrinvest West Africa Plc, Ike Chioke, said that despite the rating downgrade from “B+” to “B” by S&P in third quarter of last year, and a recent downgrade by Fitch (long-term foreign and local currency issuer rating) to “B+” with a negative outlook, the Eurobond was over-subscribed.
This, he noted, was in contrast to consensus expectation, given the protracted liquidity crisis in the domestic currency market which has affected capital flow.
Chioke said: “At 7.9 per cent yield, we can imagine that a stable outlook for crude oil prices and the considerable gains recorded against militancy in the Delta region, which pushed back output level to 1.9 million barrel per day (mbpd) from 1.6mbpd, may have buoyed interest in the issue. Overall, we think the success of the Eurobond is positive for fiscal policy given the need to finance this year’s budget and restore the economy to the path of growth,” he said in an emailed note to investors.
Chioke noted that the National Bureau of Statistics (NBS) recently published its fourth quarter 2016 capital importation report.
The Bureau valued the total capital inflow into Nigeria during the period at $1.5 million, implying 15 per cent and 0.5 per cent decline quarter-on-quarter and year-on-year respectively.
The slowdown in capital inflow in the last quarter was as a result of the decline in portfolio investments (FPIs) against the impact of the increase in Foreign Direct Investments (FDIs) and other investments.
The NBS report said: “The 2016 fourth decline in capital inflow was in contradiction of the performance recorded in third quarter when quarter-on-quarter capital imported increased 74.8 per cent in reaction to the adoption of the flexible exchange rate policy by the Central Bank of Nigeria (CBN).
“A further breakdown of the fourth quarter capital inflow showed that portfolio investments in bonds declined from $369 million in third quarter to $25.4 million whilst investments in equities dipped from $201.1 million in third quarter to $176.5 million.
“The year-on-year capital importation fell to between 4.9 per cent and $5.1 billion in 2016 from $9.6 billion in 2015 – the lowest capital importation recorded in almost a decade. FPIs declined faster in 2016, down 69.8 per cent year-on-year relative to 27.8 per cent decline in FDIs.
“There are indications that the protracted liquidity crisis, market fragmentation, price misalignment and the widening spread between the interbank and parallel markets rates will continue to constitute impediments to capital importation in Nigeria.”
The Director-General of the Debt Management Office (DMO), Abraham Nwankwo, said Nigeria’s low debt to GDP ratio meant that the country can borrow more to fund the budget, infrastructure and other essential projects that will stimulate the economy and create jobs.
The DMO won the confidence of international investors, leading to the oversubscription of the offer. The excitement in the offer was driven by international investors’ endorsement of the Federal Government’s initiatives at economic recovery.
Investors, hungry for higher returns in a low interest rate environment, reckon that Nigeria’s benign debt levels, recovering foreign exchange reserves and a potential yield above seven per cent, as reasons enough to look beyond the its economic woes.
The $1 billion Eurobonds offer received of ‘B+ (EXP) rating from Fitch Ratings. The assignment of the final rating is contingent on the receipt of final documents materially conforming to information already reviewed.
The rating is sensitive to changes in Nigeria’s Long-Term Foreign-Currency IDR. Fitch had earlier affirmed Nigeria’s Long-Term Foreign-Currency IDR at ‘B+’ and revised the Outlook to Negative from Stable. The Long-Term Local-Currency IDR is also ‘B+’ with a Negative Outlook.
The success of the offer at a time sentiment towards African debt has soured after Mozambique missed a coupon payment was attributed to DMO’s commitment and expertise in the debt sale. The DMO facilitated the success of the offer despite the poor state of the economy. The debt office, analysts said has proven Nigeria’s resilience with the Eurobond likely success.
The last time Nigeria issued dollar-denominated bonds in July 2013, the barrel price of oil was above $100 but the slump in prices from $115 in June 2014 to just $28 a barrel by January last year hurt Nigeria’s economy.
The worsening dollar scarcity makes this new borrowing plan imperative. Nigeria sold dollar bonds twice, the first was in 2011 when it raised $500 million through Eurobonds and subsequent two issuances in 2013 when it raised $1 billion of five and 10-year debts to finance budget deficits.
“The government has access to hard currency even if they are restricting the access of other agents in the economy,” said Kieran Curtis, investment director at Standard Life Investments, who also plans to look at Nigeria’s upcoming bond issue. Nigeria’s existing 2023 dollar bond yields about 6.7 per cent, or 170 basis points lower than Ghana’s 2023 bond.
The floating of the Eurobond is part of the planned Federal Government’s Medium Term Note (FGMTN) Programme (2016 to 2018) and is expected to help the government bridge the N2.2 trillion deficit in this year’s N6.07 trillion budget.
A notice of request for proposal from Debt Management Office (DMO) said the purpose of the FGMTN programme was “to enable the Federal Government have the flexibility of quickly taking advantage of favourable market conditions in the ICM to raise funds, if and only when the need arises”.
The government had increased 2016 budget by 20 per cent, allocating one-third to infrastructural projects including roads, rail, ports and bridges. This, it believed, would stimulate the economy already battered by a drop in crude oil production/prices even as the International Monetary Fund (IMF) projected that the economy will contract by 1.7 per cent this year.
Associate – Research, Eczellon Capital Limited, Mustapha Suberu, said that the government should focus more on external borrowing, and less on local borrowing, insisting that the foreign debt is cheaper. Describing borrowing as not a bad idea, he advised that borrowed funds must be used for infrastructure and raise the competiveness of the economy. He also stressed the need for adequate monitoring to ensure that borrowed funds were deployed to projects they were meant for.
The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, explained that with declining government revenues from oil, budgetary allocations alone may not be enough to finance the country’s infrastructure deficit. Prof. Ekpo admitted that the debt option remained the most viable at this time. He said Nigeria’s rebased $510 billion GDP economy has given it more room to borrow more to bridge infrastructure gap.
According to him, the available power generation capacity of about 2,000 megawatts, is far cry from the estimated 10,000 to 12,000 megawatts demand. This has resulted in frequent and unpredictable load shedding and a heavy reliance on generators as alternative power source by consumers.
He said: “With the current political will to tackle corruption and the desire to find a solution to the infrastructure problem in the country, there is need to channel fresh investments into power supply, roads, the railway and other social amenities,” he said.
Ekpo, who noted that the times were abnormal, said the government has to borrow because the country sank into recession. He said that Eurobonds, though costlier than funds from multilateral institutions, get the cash out faster.
“If things were normal, one would advise against borrowing. But the Eurobonds are still better than domestic bonds, because of their tenor, which between five and 10 years. Although $1 billion Eurobonds at this time is not enough, but the government needs it to build infrastructure, pay salaries in 28 states that owe their workers thereby stimulating demand,” he said.
On repayment plans, Ekpo said that the government can get the funds to pay subscribers or issue another Eurobonds when the bonds mature.
To him, the continued slide in government revenues from crude oil, its plan to provide tangible assets like housing, power (electricity), transport, education, communication, and technology, may be hampered by paucity of funds hence the need to key into the Eurobonds project.
Road to the offer
The Federal Executive Council (FEC) had last December, approved the appointment of transaction parties for the one billion dollars Eurobond to be issued next year. Minister of Finance Mrs. Kemi Adeosun, who broke the news after the FEC meeting, listed the transaction parties as Citigroup, Standard Chartered Bank, Stanbic IBTC, Whiten case, Banwo and Ighodalo and Africa Practices Communications Advisers.
She said: “The $1 billion Eurobond programme is part of the funding for 2016 budget and we hope to be able to commence the process in January. We obtained certificate of no objection from the Bureau of Public Procurement (BPP) for the appointment of those parties, having undertaken full competitive open tender process.”
Adeosun went on: “We are confident that we will be able to complete the transaction expediently with significant interest. The oil price stability obviously is helping us. Currently, there is a bit of demand for emerging market papers. We’re looking at a maximum of $1 billion.
“We need to go out and sell our story, talk to people, talk to the market – and get the best value,” Adeosun said, adding that Nigeria’s paper is trading around eight per cent mark.
She added: “We are expecting to get quite a competitive pricing on the issuance programme, which I said, is to be used for the purpose of funding capital projects in the 2016 budget within the month of January. The other thing to note is that these parties that have been appointed would run any Eurobond issuance programme for the next three years so that we don’t have to keep on retendering, unless there is a major problem with any of them they will be our parties for the next three years.”
Debt profile
Nigeria’s total debt rose to N16.29 trillion (about $65.42 billion) as of June 30, last year as against N12.60 trillion ($65.42 billion) as of December 2015.
DMO’s chief, Nwankwo, insisted that the country’s public debt-to-GDP remained sustainable despite the slump in crude oil prices.
According to him, while other countries base their borrowing on debt- GDP ratio of 56 per cent, Nigeria will not exceed 19.39 per cent until 2017.
His words: “Our debt continues to be sustainable, despite all these volatilities in the ICM and the collapse of oil prices. However, it does not mean that Nigeria should go and sleep and hope that providence will continue to provide for them.”
He noted that the country has abundant resources in agriculture, solid minerals, Information Communications Technology (ICT), among others that offer ample opportunity for diversification of the economy to boost revenue.
Nwankwo stressed the need for Nigerians to face the reality that oil boom was over and may not reoccur anytime soon – by making wise decisions to invest in infrastructure, revamp agriculture, improve power supply and focus on the real sector. This, he said, will make the economy more productive and competitive.
in other countries
Nigeria is not alone in the Eurobonds race as many African countries have successfully raised cash from the ICM. This issuance of Eurobonds has gained momentum in recent years as countries seek to lock in favourable rates from the market.
For Nigeria, the successful issuances of three Nigerian Sovereign Eurobonds in the ICM, one in 2011 and two in 2013 – have opened the window for the private sector to raise the required foreign currency funds. Local banks and other companies are now able to fund long-term real sector projects in agriculture, manufacturing, housing, mineral exploration and processing, infrastructure for diversified and sustainable economic growth, towards employment generation and poverty reduction.
