Nigeria’s oversubscribed Eurobond bolsters sentiment

The largest economy in Africa received a pleasant surprise in February following its successful Eurobond issue which displayed a high level of confidence by the international investment community in Nigeria’s structural transformation.

Although there were some concerns over the Fitch downgrade obstructing the $1 billion eurobond issue, the offer defied expectations and was nearly eight times oversubscribed with investors placing more than $7.8 billion in bids.

This visible success marks a major turning point for Nigeria as it embattles its economic woes and continues to highlight how international investors can see a bright future for the nation if it succeeds in its quest to diversify while breaking away from a recession. The current momentum for the first quarter of the year has turned positive for Nigeria which should encourage the central bank to take action in a bid to retain further stability.

There is a strong likelihood that the optimism over the Central Bank of Nigeria (CBN) intervening to bridge the gap between the official and black market exchange may have played a part in the impressive Eurobond over subscription.

When factoring how global markets have predicted that oil prices may stabilise coupled with Nigeria’s oil output potentially hitting 2.5 million barrels a day by 2020, it can be understood why investor attraction towards the nation has risen exponentially in such a short period. Although the Fitch downgrade initially dented risk appetite and sparked some fears of a higher risk premium, the predictions from the World Bank and IMF suggesting that Nigeria may snap out of a recession continues to fuel risk sentiment towards the nation. The attributes for Nigeria to experience super normal growth are slowly falling into place and global markets have seen the unlimited potential if the 2017 budget of recovery and growth is enacted correctly.

The Eurobond presents many benefits to Nigeria with a critical one being it will be used to fund infrastructure projects in the 2016 Federal Budget. The weak infrastructure has been a major cause for concern but this could change if nation starts to fund critical projects such as standard-gauge railway lines linking to Lagos to Kano, constant power supply and fresh roads for transportation.

Another major talking point is the Eurobond has the ability to drive down Nigeria’s spiralling inflation. It should be kept in mind that the Eurobond can potentially reduce the ongoing pressures on domestic borrowing which may have a positive knock on effect that may reduce local interest rates consequently cooling inflation. While the Nigerian government may be commended on its ability to deliver at the most critical of times, markets will be observing how the funds are implemented to reviving the nation’s economic growth.

Although a sense of positivity can be felt across the Nigerian economy following the string of positive developments, the naira still remains vulnerable against the Dollar and other majors on the black market exchange. As of writing the naira trades around 518 to the dollar with further declines expected on the back of external risks. It must be understood that the prospects of higher US interest rates this year have enticed speculators to attack the naira incessantly while expectations of the Central Bank of Nigeria devaluing the naira has capped upside gains.

Fundamentally, economic data from Nigeria remains bearish with inflation; unemployment and overall economic growth remain major causes for concern. While there is a possibility of the risk-on trading environment supporting the NSE, the naira could remain vulnerable to heavy losses in the medium term especially if the CBN eventually devalues the naira on the official exchange. A resurgent Dollar in the medium term coupled with repeatedly negative domestic economic data from Nigeria could expose the naira to further downside losses with targets stretching towards 550 on the black market exchange.

Other external risks which may impact Nigeria in the short term gravitate around oil prices volatility and the Trump fuelled uncertainties. Although Oil prices have found some stability this quarter amid the optimism over OPEC and non-OPEC members in compliance with their production cuts, the rising fears of US shale sabotaging OPEC’s efforts to fight the oversupply woes could leave oil prices volatile.

WTI Crude currently trades in a very wide range with $54 acting as a very stubborn resistance that bulls have struggled to conquer. A situation where fears resurface over the oversupply persisting could encourage sellers to drag WTI Crude back towards $52 and potentially lower which may be felt by Nigeria. When adding the fact that recent reports have shown Nigeria struggling to bolster oil production amid the militancy in the south, the persistent disruptions and threat of lower oil prices could continue to have undesired consequences upon the nation.

Despite the gloom and doom in the short term, Nigeria seems to be on the correct path to recovery in the first quarter of 2017 with the impressively oversubscribed Eurobond deal boosting confidence towards the nation. Although Dollar scarcity remains a pending issue with expectations rising over the CBN devaluing the naira on the official exchange, the confidence international investors have shown towards the nation has bolstered overall sentiment.

Nigeria still remains exposed to external and internal risks but the longer-term outlook has turned positive, especially if the 2017 budget of recovery and growth is enacted correctly. A weak naira is still the recurrent theme with further depreciations expected as the combination of a resurgent dollar and pending CBN devaluation encourages bearish investors to act.

Now Nigeria has received the much needed funding, markets will continue to observe the critical steps taken as the nation embarks on its quest to diversifying away from oil reliance to one that is self-sufficient and sustainable.

Otunuga is a research analyst at FXTM.