Nigeria’s risk premium rises against peers amid economic uncertainty

Investors in the Nigerian fixed-income space remain uncertain about the economy as they demand higher compensation for higher risk. Analysts, on their part, continue to restate the need for market-moving economic policies and reforms upon President Muhammadu Buhari’s assumption of office for a second term.

The uncertainty is evident as the spread between Federal Government of Nigeria (FGN) benchmark 10-year bond and the US 10-year bond stood at 12.03 percent a day before the President’s swearing-in. The FGN 10-year bond yield closed on Tuesday at 14.35 percent versus the US 10-year treasury yield which closed at 2.32 percent.

While the widening spread

observed in 2018 was attributed to rising political uncertainty, fear of election which caused investors to demand a higher risk premium to remain invested in the local currency bond, investors currently still perceive Nigeria in a precarious state, hence the demand for higher risk premium.

Against trends witnessed in other African countries like South Africa, Kenya and Egypt, where spreads are thinning, Nigeria has witnessed an upward pressure on yields for its 10-year dated national bond in the last three months from 14.19 percent.

Although Nigeria lags Egypt in yield spread against the US 10-year bond, Egypt has seen yields decline from about 18 percent to 15.96 percent. Same trend was witnessed in South Africa and Kenya.

Although Nigeria has been able to maintain a relatively stable exchange rate, thanks to the efforts of Central Bank of Nigeria Governor Godwin Emefiele, the decelerating growth in the nation’s GDP and the need for reforms are major factors pressuring up yields in the space.

Economic growth in Nigeria has slowed down this year, growing at about 2 percent which significantly under performs economists’ expectations at the beginning of the year, whereas in the US economic growth is now above 4 percent for the first time in decades.

International Monetary Fund which correctly predicted that Nigeria would grow its economy in 2017 by 0.8 percent forecast economic growth for 2018 to be 2.1 percent. However, as at the end of the fourth quarter 2018, Nigeria’s economy underperformed the forecast, recording instead a 1.93 percent annual growth.

The first quarter of the year 2019 saw growth slow quarteron- quarter to 2.01 percent from 2.38 percent in Q4 2018, as both oil and non-oil sectors declined in growth.

Amongst several reasons for the slowdown, Emiefele in the last Monetary Policy Committee (MPC) meeting urged banks to turn on the taps and increase lending to stimulate the economy, or have access to a near-risk-free way of making money choked off.

Other analysts tie the widening spread to a year-long risk off trade in emerging markets which in Nigeria’s case is fuelled by higher levels of political uncertainty.