Friday, September 24, 2021 / 3:35 p.m. / by CardinalStone Research / Header image credit: Ziraat Bankasi
Nigeria successfully entered the international capital market on Tuesday, issuing $ 4.0 billion in Eurobonds. The issue was split over three maturities, $ 1.25 billion over the 7 year, $ 1.5 billion over the 12 year and $ 1.25 billion over the 30 year, with respective yields of 6.125%. , 7.7375% and 8.250%. The total subscription was $ 12.2 billion, which implies a coverage offer of 4.1x. This was not surprising to us, given the cumulative effect of the high global stock of negative yielding debt (Chart 1), high global liquidity (Chart 2) and Nigeria’s moderate to low risk of debt distress.
CBN unlikely to accelerate response to pre-pandemic levels in the short term
Since the start of the year, the tightening of currency liquidity has intensified due to: 1) weak intervention by the CBN and; 2) low portfolio inflow. For the first point, the CBN’s current monthly intervention in the foreign exchange market is probably less than $ 1.8 billion, which is 1.7 times lower than the first quarter average of 20 (level before pandemic). This primarily reflects the impact of the OPEC + cap on crude oil production and the lingering challenges at various oil terminals, which have largely masked the pass-through of rising oil prices. The second point is corroborated by the drop in capital imports to a 22-quarter low of $ 876 million in Q2’21 (from $ 1.2 billion in Q2’20). These factors may have driven the average window I&E revenue down to $ 108.7 million in 2021, from $ 345.0 million in the first quarter of 20.
Despite issuing Eurobonds, CBN body language suggests it is unlikely to increase intervention sales to pre-pandemic levels in the near term. Our view is based on outstanding currency rationing (with the suspension of BDC sales in July), existing REIT arrears, and the unreported dividend from foreign shareholders. Either way, Eurobond liquidity equates to just 1.7 months of intervention sales, assuming a pre-pandemic monthly CBN foreign exchange supply of $ 2.3 billion, all other things being equal. Moreover.
Foreign investors may need more conviction
In our opinion, while the influx of Eurobonds is essential, it may not be enough to induce a material resurgence of capital inflows in the country in isolation. We believe that foreign investors may need to be more convinced before making any big bets. Thus, the issue of arrears in demand for outstanding dollars will need to be addressed, and the overall foreign exchange liquidity framework will need to be improved to enhance investor confidence. In addition, foreign investors may demand an improved carry trade that better reflects the Nigerian risk environment, especially given the pre-election uncertainties ahead of 2022. The pre-election year possible risk update is supported by the contraction average capital imports of 27.0% in two of the last three pre-election years.
The parallel market premium will remain broadened
Following the cessation of currency sales to BDCs, the Naira deteriorated on the parallel market, trading at a premium of 38% against 21.2% at the start of the year. This trend is likely to continue, as businesses and individuals who import CBN-restricted items will continue to source foreign currency on the black market. Our basic expectation is that the premium will remain high, except for a significant increase in the supply of currencies through other channels.
Moderate risk of distress despite increasing debt level
Despite growing concerns about debt in Nigeria, the country remains at low risk of debt distress due to the low stock of debt denominated in foreign currencies, which has masked the impact of exchange rate shocks. Nigeria’s total public debt (DMO and non-DMO) is estimated at 34.2% of GDP, lower than that of most SSA peers – Ghana (76.7% of GDP) and Kenya (66.7% of GDP). 5% of GDP). Nonetheless, the debt remains a concern, given that it absorbs a significant portion of federal government revenue (98.0%) and translates into significantly reduced fiscal leeway.
In addition, we estimate that the current foreign exchange reserves (including the newly issued Eurobond) appear sufficient to cover the total external debt service requirements and imports for about 3 months. In addition, at 270.0%, Nigeria’s short-term external debt coverage is well above the IMF threshold of 100.0%. Positively, Eurobond repayments are unlikely to peak until 2027/2028. The current schedule does not include more than one maturity repayment per year (see Figure 8), which seems relatively comfortable in the context of the current realities of foreign exchange reserves.
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