September 24, 2021/CardinalStone Research

Event

Nigeria successfully accessed the international capital market on Tuesday, issuing $4.0 billion in Eurobonds. The issuance was spread across three tenors, $1.25 billion on the 7-year, $1.5 billion on the 12-year and $1.25 billion on the 30-year instrument, with respective yields at 6.125%, 7.7375% and 8.250%. Total subscription was $12.2 billion, implying a bid to cover of 4.1x. This was unsurprising to us, given the cumulative effect of high global stock of negative-yielding debt (Figure 1), elevated global liquidity (Figure 2), and Nigeria’s moderate-to-low risk of debt distress.

CBN is unlikely to ramp up intervention to pre-pandemic levels in the near term

Since the start of the year, the FX liquidity crunch has intensified due to: 1) low intervention by the CBN and; 2) weak portfolio inflows. To the first point, CBN’s current monthly intervention in the FX market is likely below $1.8 billion, which is 1.7x lower than the average for Q1’20 (pre-pandemic level). This mainly reflects the impact of OPEC+’s cap on crude oil production and persistent challenges at various oil terminals, which has largely masked pass-through from higher oil prices. The second point is corroborated by the plunge in capital importation to a 22-quarter low of $876 million in Q2’21 (vs $1.2 billion in Q2’20). These factors may have driven down average turnover in the I&E Window to $108.7 million in 2021 from $345.0 million in Q1’20. 

Despite the Eurobond issuance, the CBN’s body language suggests that it is unlikely to ramp up intervention sales to pre-pandemic levels in the near term. Our view is premised on the ongoing FX rationing (with the suspension of BDCs sales in July), existing FPI backlogs, and the unrepatriated dividend of foreign equity holders. In any case, the Eurobond liquidity is equivalent to just 1.7 months of intervention sales, assuming CBN’s pre-pandemic monthly FX supply of $2.3 billion, all else equal.

Foreign investors may need more convincing

In our view, while inflow from Eurobond is essential, it may not be enough to drive a material resurgence of capital inflows to the country in isolation. We believe that foreign investors may need better convincing before making big bets. Thus, the issue of outstanding dollar demand backlogs would need to be addressed, and the overall FX liquidity framework will need to be improved to enhance investors’ confidence. In addition, foreign investors may require an improved carry trade that better reflects the Nigeria risk environment, especially given the forthcoming preelection uncertainties of 2022. The point on possible pre-election year risk is supported by the average capital importation contraction of 27.0% in two of the last three pre-elections years.

Parallel market premium to remain widened

Following the halt in FX sales to the BDCs, the Naira has taken a turn for the worse at the parallel market, trading at a premium of 38% versus 21.2% at the start of the year. This trend will likely persist as corporates and individuals who import items restricted by the CBN will continue to source FX from the black market. Our base case expectation is for the premium to remain elevated, save for a material increase in FX supply via other channels.

 Moderate risk of distress despite rising debt level

Despite the rising debt concerns in Nigeria, the country still maintains a low risk of debt distress due to the low stock of foreign currency-denominated debts, 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 most SSA peers – Ghana (76.7% of GDP) and Kenya (66.5% of GDP). Nonetheless, debt remains a concern, given that it absorbs a significant portion of federal government revenues service (98.0%) and results in materially low fiscal space.

Furthermore, we assess that the current FX reserve buffers (including the newly issued Eurobond) appear sufficient to cover the total external debt service requirements and imports for about 3months. Also, at 270.0%, Nigeria’s short-term external debt coverage is well above the IMF threshold of 100.0%. Positively, Eurobond repayments are not expected to peak until 2027/2028. The current schedule does not include more than one maturity repayment per year (see Figure 8), which looks relatively comfortable in the context of current FX reserves realities.