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Nigeria’s Vanishing Reserves Add Risk to Eurobond

Nigeria Vanishing Currency Reserves Add Risk Eurobond Sale
A petrol station attendant counts Nigerian's currency, the naira. Photographer: Suzanne Plunkett/Bloomberg

Nigeria is depleting its foreign currency reserves to defend the naira and running down oil savings before elections next year, damping investor confidence as the government prepares its first global bond sale.

Reserves fell by almost $10 billion to $33.1 billion in the year through Nov. 29, according to data compiled by the Central Bank of Nigeria in Abuja. The reserves include the government’s Excess Crude Account.

Fitch Ratings cut its outlook Oct. 22 for the sovereign debt rating on Nigeria, Africa’s biggest oil producer, even as crude prices held above $80 a barrel. With the threat of violence before April’s election increasing, investors may move to take more money out of the country, straining the central bank’s policy of keeping the naira pegged close to 150 to the dollar. As the money drains away, the West African nation pushes ahead with a $500 million bond sale for this month.

“They aren’t saving for infrastructure, they aren’t saving for a rainy day,” said Veronica Kalema, Sub-Saharan Africa analyst at London-based Fitch. “That’s no way to manage an oil economy.”

Concern that violence will disrupt next year’s election has been boosting foreign currency demand at biweekly central bank auctions since September, Kalema said.

It also sent the yield on Nigeria’s 91-day Treasury bills to 7.9 percent on Nov. 26 from a record low of 1.04 percent on March 11, according to central bank data. Ghana’s 8.5 percent fixed-rate Eurobond, due October 2017, yielded 6.06 percent as of 9:32 a.m. in Accra, down from 7.53 percent on March 1.

Bomb Killings

Two bomb blasts killed 12 people in Abuja on Oct. 1 as Nigeria celebrated 50 years of independence from the U.K. Rebels from the oil-producing Niger delta claimed responsibility. They also have stepped up assaults on oil installations, including those owned by Exxon Mobil Corp. and Afren Plc.

Alleged militant leader Henry Okah said in a telephone interview from jail yesterday that the insurgency won’t end until the government allows the region to control its oil wealth.

The central bank of Africa’s most populous nation has been hemorrhaging reserves even as crude output rose 15 percent to 2.15 million barrels a day in October from a year ago, according to data compiled by Bloomberg. Oil accounts for 95 percent of Nigeria’s foreign currency earnings.

The flight of capital contrasts with such other emerging markets as South Africa and Brazil, which have seen inflows soar as near-zero interest rates in Europe, the U.S. and Japan fuel demand for high-yielding assets. Brazil’s real has strengthened 38 percent against the dollar since the start of last year, while South Africa’s rand has climbed 36 percent.


“It is curious that with a wave of liquidity flooding into emerging markets, Nigeria stands apart,” Razia Khan, head of Africa economic research at Standard Chartered Plc, said in an interview in Johannesburg. “With oil prices stable and oil output back to its best levels since 2006, it is a concern that foreign exchange reserves have not risen.”

Demand for dollars climbed to a high of $741.4 million at the Sept. 27 central bank auction, compared with an average of $248.9 million in the first eight months, the bank’s data show. The naira weakened to as low as 155.675 per dollar on the day, compared with the central bank’s target of 150. It traded as low as 151.55 today.

“The trend in reserves is worrying,” Samir Gadio, an emerging-markets economist at Standard Bank Group Ltd., said in a phone interview from Lagos. “When you have a heavily managed currency, and your reserves are dropping like this, at some stage the market will start to panic.”

Excess Crude

Nigeria’s reserves also are being depleted as the government runs down its Excess Crude Account, financed from savings set aside for times when international oil prices fall below the benchmark in the budget. That isn’t the case now. Oil was trading as high as $89.57 a barrel in London today, compared with $60 forecast in the budget.

About $5.5 billion was withdrawn from the fund this year for investment in power plants, and another $1 billion was used as seed capital for a new sovereign wealth fund, Okwudili Ojukwu-Enendu, a spokesman for Finance Minister Olusegun Aganga, said in an e-mailed response to questions. He declined to say how much remained. Aganga told Bloomberg on Sept. 3 that the account held between $500 million and $800 million.

On Oct. 25, Aganga said Fitch’s lowering of the outlook on Nigeria’s BB- credit rating to “negative” from “stable” was “unduly punitive” as the creation of the sovereign wealth fund would bolster government finances. The bill is currently awaiting approval from lawmakers.

Less Debt

Another factor boosting confidence is Nigeria’s relatively small public debt: about 15 percent of gross domestic product, according to the International Monetary Fund. That compares with 127 percent in Greece and 68 percent in the U.K. Investors are unlikely to shun the international bond sale, Kalema said.

Nigeria appointed Citigroup Inc. and Deutsche Bank AG as bookrunners for its Eurobond sale, Ojukwu-Enendu said on Nov. 3. Barclays Capital and FBN Capital Ltd., a unit of First Bank of Nigeria Plc, were named as advisers in October. Nigeria expects to conclude the sale by mid-December, Abraham Nwankwo, director- general of the Debt Management Office, said Nov. 2.

Violence surrounding next year’s election is the biggest threat to a bond sale by a country with a history of military intervention and ethnic conflict.

President Goodluck Jonathan, a Christian from the south, is running for re-election, angering Muslims from the north who regard it as their turn to hold the presidency in a country divided almost evenly on religious lines.

“Nigeria’s political backdrop, more contentious in the run-up to 2011 than is usually the case, may be feeding nervousness about the continued stability of the naira,” said Khan. Building reserves “is key to the restoration of confidence.”

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