Investors move in on Nigeria’s bond markets. Can the influx of capital be channeled to sustainable growth and employment?
Nigeria: The ever-sparkling gem of the African continent now boasts robust capital markets to its long list of attractive qualities for investors.
The most recent financial crisis saw dramatic reductions in crude oil prices from USD 147 per barrel in July 2008 to USD 47 per barrel in January 2009, which caused further declines in external reserves and accruable revenue. The market capitalization for all Nigerian publicly traded companies fell by nearly 46% during this period and investors fled from Nigerian equities. Since then, things have been significantly different.
Equities are nearing their pre-crisis levels thanks to significant mergers and acquisitions (M&A) activity that has increased shareholder value within the financial services and consumer goods space. Oil prices have also made substantial gains back to USD $104 a barrel for Brent Crude helping to boost government revenue and the shift by the Federal Government to increase their exposure to debt capital markets to the benefit of international investors. Federal Government Notes (FGN) is yielding 11% on 5-year notes and nearly 13.75% on 7-year notes, with Sub-national bonds are yielding slightly higher. The attractive yields have already ensured FGN a place on the JP Morgan GBI-EM Index that analyst predict will bring over USD 1 billion into the country and as of the 1st of April 2013, FGN bonds will also be listed on the Barclays emerging markets government bond index which will attract a further USD 16 billion.
However, all the interest in government bonds has done little to help stimulate Nigeria’s corporate bond market, as the yields are less attractive and investor appetite for risk on such bonds remains low. The International Finance Corporation (IFC), the investment arm of the World Bank, was in Nigeria to help revitalize this market with the first ever supranational bond issue in the country’s history. Using their AAA credit rating, the IFC issued naira-denominated bonds to the value of USD 76 million with a 5 year maturity at a yield of 10.2%, which is far more than what investors can hope to realize in developed markets for a corporate bond with a similar rating. This bond issue, although significantly smaller than federal and subnational bonds like the USD 500 million dollar bond issue, will help alleviate concentration risk in federal bonds and help draw attention to other Nigerian companies that want to enter the corporate bond market as a source for funding.
Granted, Nigeria has become an unfortunate acronym for corruptive practices, with a long history of political instability with genuine concern arising from the presence of the likes of Boko Haram and Movement for the Emancipation of the Niger Delta (MEND). However, such instability has done little to dampen investor appetite for Nigerian paper as considerable yield premium continues to make a number of investors very interested in getting exposure to Nigeria. This trend looks sure to continue and could help Nigeria finally stay the course of proper sustainable development with the influx of capital coming its way.
