June 16, 2022/United Capital Report

Recently, the finance minister, Zainab Ahmed, announced that the FGN had shelved plans to raise $950mn from the international debt market due to pricing concerns, and over the timeframe considerations for the fundraising. The recent move comes amid unfavourable market conditions, as central banks globally adopt hawkish policies amid rising inflation. 

Following the economic recovery from the global economic downturn amid the coronavirus and global supply chain disruptions, major central banks adopted aggressive hawkish policy stances to tackle inflation. As expected, this has caused a ripple effect on emerging market debt’s ability to raise debt. The result of these actions is an increased opportunity cost for Nigeria’s Foreign portfolio investors, who will demand more compensation to invest in Nigerian Eurobonds. This, however, is not unique to Nigeria as other emerging markets are facing higher yields. In 2021, the appetite for foreign-denominated debt in the SSA region was substantial, bolstered by the need to finance maturing obligations and infrastructure projects, especially as a support to the economic recovery in the aftermath of the coronavirus pandemic. In H1-2021 alone, Benin, Ivory Coast, Ghana, and Kenya accessed the International Capital Markets (ICM), with the issuances priced to yield at 4.8%, 4.3%, 8.6% and 6.3%, respectively (11- 12- year tenors). However, H1-2022 was met with softer sentiment toward the ICM, with only Nigeria, Angola and South Africa coming up with issuances priced to yield 8.375%, 8.75%, and 5.874%, respectively (7- and 10- year tenors).

Going forward, we expect continued hawkish stances would lead to narrowing spreads in interest rates, forcing EMs to respond and defend fund flows. This could be problematic for some EMs experiencing higher fiscal imbalances on the back of fragile recovery.  Locally, In the 2022 budget, the government has stated its intention to finance its deficit (excl. GOE’s budget) through a mix of asset sales and domestic and foreign borrowings. Following the shelving of the Eurobond issuance, the domestic debt market remains the FGN’s most viable option for deficit financing. Thus, we expect the FG to rely heavily on the domestic debt market for its funding needs). Additionally, we expect pricing power to shift into the hands of the private sector money managers.