July 11, (THEWILL) – Nigeria’s 10-year Eurobond closed the first half of the year at a yield of 13.45 percent or $69.8 in unit price, pointing to one of the worst yields in years for the economy.
Sovereign Eurobond yields at double-digit rates are often considered junks suggesting they are either unsafe to buy or unattractive to bond buyers due to several factors.
Emerging markets like Nigeria have seen bond prices fall following the Russia-Ukraine war and the decision by the US Fed to raise rates to combat rising inflation.
A recent Financial Times article indicates about $50 billion have been pulled out of emerging market bonds as borrowing gets harder at a reasonable cost.
Nigeria last tapped the Eurobond market in March 2022, when it borrowed $1.25 billion in a 7-year bond at a whopping cost of 8.375%.
However, analysts believe it might not be able to go on another round of borrowing considering the high borrowing costs.
For Nigeria, the situation is even worse with the 10-year Eurobond now trading at a yield higher than its equivalent in local currency.
For example, the recently sold 10-year April 2032 FGN Bond closed in June at a yield of 12.5% per annum, almost 100 basis points lower than the 10-year Eurobond Yield.
The reasons include the fact that bond yields trading higher than 13% are likely to cost more should it decide to tap that market again if it costs more to borrow in foreign currency compared to local currencies.
The exchange rate risk is also an added consideration making it extremely futile to seek more dollar loans.
The government also recognizes this as comments from officials confirm the country is unlikely to tap the Eurobond market based on current realities.
Nigeria’s DG of the Debt Management Office, Patience Oniha confirmed at an investor conference in June 2022 that Nigeria had no plans to source debt from the Eurobond market this year as it shifts its focus to domestic borrowing and sourcing from concessional sources.
“When we saw where the market was based on the challenges we needed to address in terms of COVID-19, we planned the borrowing to be domestic and then external from concessional sources.
“We did not include the plan for this year to access the international market.
“We did not know how long this would last, what the cost would be and all the countries that came to the market were all investment-grade so we did not want to take a chance,” Oniha said.
Nigeria’s Eurobond portfolio is currently $15.9 billion and represents about 39.8 percent of the total $39.9 billion foreign debt portfolio.
There are fears that with Nigeria unable to tap the Eurobond market, and crude oil theft persistently severe, the country may not be able to fund new demands for forex.
Nigeria’s external reserves at about $39 billion have swelled by about $6 billion in the last year mostly due to foreign debt borrowings.
Yet, access to forex remains a major challenge as the central bank continues to press businesses to source for their own forex rather than burn through its reserves.
A dwindling appetite for new foreign debt borrowing could crystallize into a major dollar scarcity if Nigeria is unable to earn significantly from crude oil sales in the next few months.
The Nigerian economy relies heavily on crude oil sales, foreign portfolio inflows, and debt offerings to shore up forex liquidity.
Another option could be the less desirable IMF or Multilateral loans which often come with very stiff conditions.
This leaves forex buyers with no choice but to seek forex themselves at the risk of a very expensive price.
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
