Analysis: Cash pours into Nigerian debt ahead of index inclusion
NIGERIA’S bond market is taking off as the biggest underwriter of emerging-market debt adds securities from Africa’s largest oil producer to its benchmark index.
Yields on 10-year naira-denominated notes have dropped 372 basis points since August 15, when JPMorgan Chase said it planned to add the bonds to its government bond index for emerging markets (GBI-EM) from October 1, compared with an average increase of 3 basis points for securities already in the measure.
Nigeria’s economic outlook was improving as policymakers removed restrictions on foreign investment, controlled inflation and steadied the currency, Giulia Pellegrini, JPMorgan’s sub-Saharan Africa economist, said this week.
Adding Nigeria to the index may lure about $1 billion (R8.2bn) to the country and increase trading in the $36bn local debt market, according to JPMorgan. The naira, devalued twice by the central bank since 2008, has risen 3 percent this year against the dollar, the best among the 23 most-traded African currencies tracked by Bloomberg.
The inclusion “could be a potential game changer”, said Morten Bugge, the chief investment officer at Global Evolution. “It’s a money machine if the currency remains stable. It’s a pretty strong story.”
Oil accounts for 95 percent of Nigeria’s foreign-exchange income and 80 percent of government revenue.
JPMorgan’s GBI-EM index may include Nigerian debt maturing in 2014, 2019 and 2022 in a gradual inclusion starting October 1 and finishing by yearend, according to an August 15 note to clients. The bonds, with a market valuation of $3.2bn as of August, may represent about 0.59 percent in the index. About $170bn of assets are benchmarked to the JPMorgan index, according to Pellegrini.
Yields on the nation’s 16.39 percent debt due in January 2022 rose 0.06 percentage point to 12.37 percent at 5.25pm in Lagos on Wednesday, after hitting a record low of 12.05 percent on September 17, according to Bloomberg data. Yields on South Africa’s notes due in 2021 fell five basis points to 6.63 percent, while the average in JPMorgan’s GBI-EM broad diversified index fell by two basis points to 5.89 percent.
“Nigeria may not be a South Africa yet, but it’s certainly going towards that direction,” Pellegrini said. The country’s “considerable yield premium will also make a number of investors very interested in getting exposure to Nigeria”.
The inclusion would increase foreign investments into Nigeria and might strengthen the naira, the Debt Management Agency said in August.
Central bank governor Lamido Sanusi lifted a requirement last year for foreign investors to hold local-currency debt for at least one year to attract capital. The removal of the restriction had been key to luring investors and improving liquidity, said Pellegrini.
Sanusi, who was named governor of the year by The Banker magazine last year for weeding out corrupt bankers, has raised benchmark interest rates 6 percentage points since 2010 to a record 12 percent. While annual inflation dropped to an eight-month low of 11.7 percent in August, it’s still above the central bank’s target of 10 percent. Policymakers kept rates on hold this week.
Foreign reserves have increased 31 percent to $40.5bn since hitting a two-year low last October, helped by a 21 percent jump in benchmark Bonny light crude from this year’s low in June. – Bloomberg