ANALYSTS HAVE said that the issuance of $1 billion of Eurobonds, as it floats the first tranche of a $4.5 billion debt programme to run through 2018 by the federal government is needed if the budget passed for the nation in 2016 would be implemented. Head of research at consulting firm, Cardinal Stone Partners Ltd, Tosin Ojo, made this known in an emailed response to questions by an online media. According to him, “It’s a good move…we definitely need some form of foreign borrowing to shore up our dwindling FX reserve and improve the supply of dollars.” “The proposed issuance size of $1 billion is double of what we have issued at any given time in
the last five years.” said Two international banks as lead managers and one local bank in the capacity of a financial adviser are being sought after, according to a statement published in the U.K’s Financial Times newspaper, Monday. Bids for the two lead managers and local lender to handle the sale, are to be submitted by noon on Sept. 19 in the capital, Abuja, the Debt Management Office (DMO) stated. Also macroeconomic & fixed income researcher at investment bank Chinwe Egwim, added that oil price and output dips have stretched the fragile fabric of Nigeria’s treasury and raising debt capital may be crucial if the country is to see through implementing a N6.06 record budget which is intended to jump start the embattled economy. “It should assist in financing the proposed deficit of N2.2trn for this fiscal year,” she said. “However, given the current macro challenges (oil price slide, fx sourcing challenges, steady hike in inflation) and the recent downgrade of Nigeria’s sovereign rating by Fitch Ratings from BB- to B+, the issue is likely to be pricier for the government as investors are likely to demand for higher yields to compensate for the country’s heightened risk profile,” Egwim added. Yields on current Eurobonds due July 12 2018, Jan. 28 2021, and July 12 2023 are 5.04 percent, 6.69 percent, and 6.88 percent respectively. “Though current yields on our Eurobonds seem to have dipped from the levels at issuance, one cannot necessarily use this as the benchmark for the proposed issuance, because size and eventual liquidity certainly play a role in the movement of yields,” said Ojo. Bond yields have risen from under five percent since May 2015, as the economy weakens and investors pull out of emerging markets, analysts say. “While $1 billion doesn’t seem high enough to inflate bid yields to double –digit, we should expect yields to be higher than the yields on Nigeria’s current Eurobonds. The pricing is what will determine the overall attractiveness of this issue – whether or not it will be oversubscribed. Investors always seek to maximise returns and our current risk perception has put them in a position to demand for higher returns,” Ojo added. Nigeria’s fiscal outcome is expected to remain in deficit in 2016 at around 4.0 percent, after reaching 3.8 percent in 2015, credit rating agency, Moody’s said in a July 29 note to investors. “On the external side, we expect Nigeria’s current account to remain in deficit in 2016 around 1.9% of GDP and the balance of payments to be slightly negative, supported by government external borrowing in H2,” Moody’s noted. These fundamental concerns and increased prospect of currency weakness have either shelved or delayed the Eurobond issuances by most African countries. In the first half of 16, there was a decline in sovereign bond issuances by 50.58 percent (year-on-year), as only South Africa ($1.25 billion) and Mozambique ($726.5 million) raised international bonds (Eurobonds), as against four issuances totalling $4 billion in the first six months of 2015. Nigeria has sold dollar bonds twice, first was in 2011 and the last time was mid-July 2013, when it raised $1 billion of five- and 10-year debt. “The conditions relative to 2011 and 2013 are very different now. As you may already know, our country risk premium will certainly be higher given the steep decline in oil price, our mono-source of FX earnings,” Ojo concluded. Nigeria saw real GDP contract for the first time in twelve years in Q1 16. FX market illiquidity and renewed militant attacks on oil installations in the Niger Delta have subdued FPI appetite for naira risk with FPI flows shrinking to record lows of -72 percent (quarter-on-quarter) and -85 percent year-on-year to $271 million in Q1 16.

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