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Oil price fall hits Nigeria bondholders

By on January 20, 2015

Nigeria bondholders are missing out on the global rally in fixed income as the economy reels from the collapse in oil prices and a sliding currency.

Average yields on naira government debt soared 2.5 percentage points in the past three months, compared with a drop of 47 basis points for emerging-market local-currency securities, according toBloomberg indexes.

Bloomberg reported that the nation’s bonds were the worst performers after Russia among 31 developing nations in the period, losing 16 per cent for dollar investors.

With the country dependent on crude exports for 70 per cent of government revenue, the 60 per cent drop in prices since last year’s peak in June has sparked investor outflows that policy makers have tried to stem by devaluing the naira and raising interest rates to a record 13 per cent.

With an election next month, markets are seeking assurances that officials are ready to cut spending and devalue the currency again, steps needed to revive the economy, according to Standard Bank Group.

“Are investors starting to get spooked? I think so,” an economist at Rand Merchant Bank in Johannesburg, Nema Ramkhelawan-Bhana, said.

“The broad market weakness in Nigeria indicates there is concern.”

Oil prices have dropped as US crude output increased, adding to global stockpiles. The price rout may extend to $35 a barrel for the benchmark US variety in the “near term” because both oil supply and demand will have a delayed reaction to falling prices, Bank of America said in a Jan. 6 report.

“Even before the oil-price collapse, there were chinks in the Nigerian state’s armor,” Ramkhelawan-Bhana said. “There were concerns about the fiscal position, and the oil price has intensified those concerns.”

The security risks are weighing on Nigeria’s debt as the United States Federal Reserve prepares to raise interest rates, increasing competition for investment among developing nations, according to the Head of Africa Strategy at Standard Bank, Mr. Stephen Bailey-Smith,

He has an underweight recommendation on the nation’s dollar debt, which is rated three steps below investment grade at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

Yields on naira debt due 2024 rose 198 basis points since the beginning of December to 15.31 per cent on Friday, while rates on Nigeria’s $500m of Eurobonds due in July 2023 jumped 146 basis points in the period.

Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of about 1.16 per cent as of Friday, an all-time low based on data starting in 1996.

Last month, Minister of Finance, Dr. Ngozi Okonjo-Iweala, proposed cutting the 2015 budget by eight per cent as falling crude erodes revenue.

Beyond any spending cuts, Nigeria needs to further devalue the naira to maximize returns from crude exports, Bailey-Smith said.

“If oil is structurally weak, you have to have a major policy shift to deal with that, and until you have a new government, you won’t have that,” Bailey-Smith said. “For now, I’m fairly bearish.”

 

[Punch]