Nigeria Helped by Low Debt as It Tackles Slump With Spending

  • West African nation’s debt-to-GDP ratio lower than peers
  • Plans to tap Eurobond market to help plug budget deficit

Nigeria is facing a recession, a plunging currency, inflation at a decade-high and a widening budget deficit. It has one thing going for it: low debt.

That means the west African nation has room to tap international markets as it plans to spend its way out of an economic slump, according to analysts including Manji Cheto at Teneo Intelligence. Nigeria said on Aug. 8 it’s seeking banks to manage a Eurobond sale of as much as $1 billion, its first foray into the market since 2013.

“If you look at Nigeria’s debt profile, the additional external debt is not likely to have any material negative impact,” said Cheto, the London-based senior vice president at Teneo. “One thing is clear, however, the yield is likely to be higher than Nigeria’s last Eurobond sale in 2013, given that the macroeconomic fundamentals have deteriorated significantly.”

Yields on the country’s $500 million of bonds due July 2023 fell 1 basis point to 6.64 percent on Thursday. The yield is down 204 basis points this year. Nigeria’s dollar-denominated bonds have returned 1.9 percent this quarter, compared with the 4.7 percent average return of dollar debt in sub-Saharan Africa, according to data compiled by Bloomberg.

President Muhammadu Buhari approved a record 6.1 trillion naira ($19.3 billion) spending plan this year after Nigeria’s economy contracted in the first quarter as revenue fell because of lower oil prices and a decline in output. The country’s ratio of debt to gross domestic product, at 13.2 percent, is the lowest in sub-Saharan Africa and about a third of the average of 37.2 percent, according to the International Monetary Fund.

Nigeria plans to borrow as much as $4.5 billion in the bond market through 2018, according to its Debt Management Office, as capital spending rises to about 1.75 trillion naira, more than four times the amount in 2015. The money will be spent on roads, railways, ports and electricity generation to support diversification of the oil-dependent economy into agriculture and solid-minerals development.

Shrinking Economy

After shrinking 0.4 percent in the first quarter, the economy is set to contract 1.8 percent in 2016 as shortages of power and foreign currency curb output, according to the IMF. The Central Bank of Nigeria increased interest rates by 3 percentage points this year to 14 percent as inflation reached 16.5 percent in June.

The currency has slumped 38 percent against the dollar since the central bank allowed it to trade freely in the interbank market on June 20, removing a currency peg that had deterred foreign investment and squeezed importers.

“The recent devaluation of the naira is a barrier lifted,” Stuart Culverhouse, chief economist at Exotix Partners LLP, said by phone from London on Wednesday. “We have seen economies slow elsewhere and that shouldn’t be a barrier to raising debt.”

Nigeria may have to pay between 7 and 7.5 percent for a new Eurobond issue, Culverhouse said. 

Budget Gap

“The market is well supported at the moment as sentiment remains constructive,” said Samir Gadio, head of Africa Strategy at Standard Chartered Bank Plc in London. Investors had expected Nigeria to borrow more than the $1 billion it plans to raise in the Eurobond market, he said.

The government has also approached the World Bank and export-credit agencies to borrow at concessionary terms in addition to commercial loans to help finance a budget gap of 2.2 trillion naira, Finance Minister Kemi Adeosun said on Tuesday in Abuja, the capital.

“Nigeria’s debt profile is one of the most favorable ones in Africa and investors appreciate that,” Culverhouse said. “They should take the opportunity while it’s available.”

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