Nigeria’s Post Election Bond Rally Stalls on Naira Concern

Nigeria’s post-election bond rally is stalling as foreign investors wait for a devaluation of the naira before buying the nation’s debt.

Yields on benchmark naira bonds due March 2024 have climbed 61 basis points in the past three days after plunging 118 basis points on April 2, the day after Muhammadu Buhari of the opposition All Progressives Congress was announced the winner in a presidential election. He beat incumbent Goodluck Jonathan in a vote described as mostly peaceful and fair by observers including those from the European Union.

Investors including Morgan Stanley, Aberdeen Asset Management Plc and Landesbank Berlin Investment GmbH cut their local bond holdings in the last quarter of 2014 as the price of crude oil, Nigeria’s main export and source of more than two thirds of government revenue, fell by 37 percent during the period. While naira government debt offers the highest yields among 31 developing nations tracked by Bloomberg, foreign investors have to factor in the increasing risk of a currency devaluation that will hurt returns when converted to dollars.

“Political risks have diminished but the other risks are still in place: a very low oil price and pressure on the naira,” Lutz Roehmeyer, who oversees Landesbank Berlin’s $1.1 billion emerging-markets debt portfolio, said by phone from the German capital on Tuesday. “You can still expect a devaluation. I see a lot of local-currency investors waiting for that to happen before they re-enter Nigeria.”

The central bank devalued its target rate for the naira to 168 per dollar from 155 in November. After that failed to stabilize the currency, it scrapped the official exchange rate on Feb. 18, moving all transactions on to the interbank market.

Soaring Assets

Buhari, 72, a former military ruler who lost three previous election bids, will be sworn in on May 29. Nigerian assets soared after Jonathan conceded defeat on March 31, easing investors’ concerns of a disputed result in a country marred by a history of election-related violence.

Nigeria’s average government bond yields fell 81 basis points to 14.47 percent on April 1, the lowest since Dec. 12. Most of the demand came from domestic investors, who don’t have to take the naira’s exchange rate into account, according to Jan Dehn, head of research at London-based Ashmore Group Plc, which manages $64 billion of emerging market debt.

The currency gained less than 0.1 percent to 199.03 per dollar at 2:30 p.m. in Lagos. It dropped 21 percent to a record low of 206.32 between the end of June and Feb. 12 as Brent oil prices plunged. That prompted the central bank to extend trading restrictions introduced in December by preventing banks from buying dollars in the interbank market without matching orders from customers needing to import goods.

JPMorgan Indexes

While those measures have helped steady the exchange rate, they have reduced liquidity and left the naira overvalued, according to Viktor Szabo, a money-manager who helps oversee $12 billion of developing-nation debt at Aberdeen, which hasn’t resumed buying naira debt.

“The currency hasn’t adjusted sufficiently,” Szabo said by phone from London on Wednesday. “It’s the turn of the central bank to act. If the move is sufficient –- we’re probably talking to above 220 a dollar –- we’d be inclined to get involved with the local bonds.”

Investors are also concerned that Nigeria may be excluded from JPMorgan Chase & Co’s emerging market local currency bond indexes that are tracked by more than $200 billion of funds. The New York-based lender put the country on index watch negative on Jan. 16 and said the central bank’s actions made it hard for investors to replicate the gauges. Nigeria has an almost 2 percent weighting in the indexes. JPMorgan will make a decision by mid-June.

Patrick Burton, a spokesman for JPMorgan in London, declined to comment on Wednesday.

‘It’s Imperative’

The lack of foreign-exchange liquidity is even more important for bond investors than the yields on offer, according to Ashmore’s Dehn.

“If there are no improvements at all in foreign-exchange liquidity then I suspect that they’re on their way out of the index,” Dehn said by phone from London on Wednesday. “I don’t think that’s in Nigeria’s interests at all. I suspect that the government will free up foreign-exchange trading relatively quickly. It’s imperative.”

It’s too soon after the presidential election for the Central Bank of Nigeria to consider removing trading limits, Ibrahim Mu’azu, an Abuja-based spokesman, said by phone on Wednesday. Monetary and fiscal policies “have to be aligned” under the new government, he said.

Mature Democracy

Until that happens, foreign investors probably won’t return despite an election result that ushered in what United Nations Secretary General Ban Ki-moon called a “maturity” of Nigeria’s democracy. The victory by Buhari marked the first time an opposition candidate beat a sitting president since independence from the U.K. in 1960.

“Foreigners are sitting and waiting for a move in the currency,” said Dehn. “The government needs to get into office first and build an economic team. But then it can happen quite quickly. It’s better just to get it out the way.”

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