August 6, 2021/CSL Research

Earlier this week, the DMO released a statement that the government has appointed eight transaction advisers from an open competitive bidding process. In our view, this signals a bright prospect from both the fiscal and external positions. The government could issue around US$6.2bn, in line with its 2021 external borrowing plans.

We believe the bond will be well subscribed, supported by (1) elevated global aggregate negative-yielding debt market value, which is estimated at $14.5tn, (2) elevated global liquidity, as most global central bankers are either retaining interest rates or remaining dovish. (3) The Eurobonds issued in Africa this year have had a cumulative oversubscription of 2x. This indicates that offshore interest remains high, and Nigeria will probably not be an exception. Furthermore, moderate risk to debt distress is expected to further support positive sentiments from investors. Nigeria’s total public is projected to reach 35.5% of GDP in 2021 from 35.0% in 2020. This remains lower than most SSA peers – Ghana (76.7% of GDP) and Kenya (66.5% of GDP) and below 40% set by the DMO.

The Eurobond inflow, together with the Special Drawing Right (SDR) of US$3.4bn allocations from IMF should support FX accretion to about US$43bn (8-month import cover) and support CBN’s efforts at managing FX liquidity. As such, we see enough legroom for the CBN to clear the existing FX FPI backlog of about US$2.bn and gradually increase monthly intervention to pre-Covid levels of c.US$3.2bn per month. The increased liquidity will also provide relief for BOP and fiscal accounts. Our base case expectation is for the current account deficit and fiscal deficit to settle at 1.2 and 5% of GDP, respectively.

In addition, we are of the view that the parallel market premium is poised to narrow. However, this will not narrow to single digits, as importers of items restricted from getting FX from the official sources will still resort to the black market. That said, Eurobond coupon payments and amortization will probably intensify from 2025 to 2030, with FGN expected to pay an average of US$1.2bn annually. As such, high foreign debt servicing in the stated periods portends a downside to both fiscal position and FX stability.