Don't Miss


Home   >   Business   >   Industries   >   Economy   >   Nigeria’s rating downgrade threatens Bond rally

Nigeria’s rating downgrade threatens Bond rally

By on March 25, 2015

A rally that made Nigerian bonds the best performers in Africa in March risks coming to an end as the credit rating of the continent’s biggest economy slides deeper into junk.

Standard & Poor’s lowered its assessment of Nigeria one level to B+, four levels below investment grade, on March 20, while changing its outlook to stable from negative. Naira bonds returned two per cent this month, the most among 31 emerging markets after Russia and the Dominican Republic, according to Bloomberg indexes. Naira debt lost five per cent in February.

Nigeria’s economy is sputtering under the weight of a more than 50 per cent plunge since June in the price of oil, its main export, and an insurgency by Islamist militants before elections on March 28. While the central bank has stemmed a slide in the naira with 17 foreign-exchange restrictions since September, policy makers may devalue the currency after the vote, so it doesn’t make sense to buy local bonds, according to an economist at Exotix Partners LLP in London, Alan Cameron.

“A downgrade worsens public and investor perception of the economy, which is already being hit,” an analyst at Ecobank Transnational Incorporated in Lagos, Kunle Ezun told Bloomberg.

Borrowing costs will increase because of the negative signal it sends, he said.
Nigeria’s currency lost 18 per cent against the dollar in the past six months, the steepest decline among 24 African currencies tracked by Bloomberg after the Zambian kwacha. It touched an all-time low of N206.32/$1 on February 12.

The International Monetary Fund cut its 2015 growth forecast for Nigeria to 4.8 percent on March 5, from 6.3 percent last year and about half the average rate over the past 15 years. Nigeria’s central bank has cut foreign-exchange reserves by 13 percent this year to $30.1 billion to defend the naira.

Depleting foreign-exchange reserves to their lowest level since 2005 means the central bank’s “capacity to intervene in the currency market has diminished rapidly,” a Johannesburg-based economist at HSBC Holdings Plc, David Faulkner said.

“The tightly contested general elections may pose risks to Nigeria’s external position,” S&P said in a March 20 statement.

“The exchange rate and monetary policy could continue to come under pressure due to the fall in oil prices, political risks, or changes in investor risk appetite.”

Nigeria is among other oil producers being downgraded by S&P, the country’s finance ministry said in a statement on March 20. The ratings company’s outlook for 2015 growth is better than IMF forecasts and being driven by non-oil industries, which will continue to support the economy, the ministry said.

The S&P reduction puts Nigeria on par with Rwanda, Kenya and Zambia.
Yields on Nigerian dollar-denominated bonds due July 2023 have been trading at a premium to Kenya debt maturing in June 2024 since mid-December.

The naira has mostly traded within a range of    N198 to 200 per dollar on the interbank market since mid-February.

“After three years of high interest rates and nine months of low oil prices, we think the limits to conventional monetary policy have been reached,” Cameron said.

“Investors should therefore expect more unconventional policy measures, as well as an exchange-rate devaluation, in the months ahead.”

“Investors are waiting for the election to pass,” Joseph Rohm, a money manager at Investec Asset Management, which oversees $107 billion, said.

“Once you see the naira devalue further you’ll see foreign portfolio flows back into Nigeria again.”

 

[ThisDay]