A flurry of improved economic indicators is helping Africa’s largest economy warm its way back to foreign investors, according to Steve Brice, the chief investment strategist at Standard Chartered, who says he is dealing with fewer questions about Nigeria compared to some 18 months ago.
“During my previous visit to Nigeria in November 2016, everyone wanted my view on Nigeria from an investment perspective,” Brice said.
“This time I’ve had very few questions and investors appear a lot more relaxed given the improved macro environment,” he told BusinessDay during a visit to the country this week.
Though foreign investors remain a tad cautious, Brice says “the uncertainty of 2016 has largely subsided.”
This is as a result of improved oil prices which are at their highest in almost three years, and dollar liquidity- being the after effect of flowing petrodollars and the creation of a market-driven FX window last year.
Some $30 billion have been transacted on the I & E window since inception in April 2017, according to data provided by trading platform, FMDQ, and that has boosted foreign activity in the stock and bond markets of Africa’s largest oil producer.
The convenience offered by the window in obtaining dollars is a departure from the acute dollar shortages that haunted Nigeria in 2016 and made it difficult for investors to repatriate dollar profits.
Things have since changed, however, with foreign investors swooping for Nigerian assets.
Brice even suggested that the country’s latest $2.5 billion Eurobond sale was partly driven by large appetite by foreign investors who can’t get enough of the country’s allure.
“It was about investors asking the government to issue longer term paper because they wanted to buy it. So this is actually investor demand driven rather than the government saying we want to do this, (and) can we find somebody to buy it.”
This month (February 2018) Nigeria sold USD2.5 billion worth of Eurobonds via a dual series offering of 12-year and 20-year maturities issued at par yields of 7.14 percent and 7.69 percent respectively.
Despite recent turmoil across global financial markets, following a rise in US Treasury yields, with the 10-year yield at four-year highs, the Eurobond offer was oversubscribed with bid-cover of 4.6x (relative to 3.8x at the last Eurobond sale in November) which drove a tightening in issuance yields from IPT range originally marketed.
The large order book for the sale reflects improved credit risk perceptions over Nigeria following the recent upswing in oil prices, according to Wale Okunrinboye, head of research at Ecobank Group.
Oil prices averaged USD69 per barrel in January 2018, which is more than double the amount in January 2016 in the thick of a supply glut that is now being drained by OPEC cuts.
The proceeds from the Eurobond sale would provide a boost to an already fast building FX reserves which will climb to USD45.3 billion (10.8 months of imports) from current levels of $40 billion.
In terms of pricing on the sale, the 12-year Eurobond was priced at a spread of 425 basis points over comparable US Treasuries, while the 30-year was issued at spread of 455 basis points (bps) down from IPT spreads of 450bps and 488bps respectively.
Given the robust demand at the sale and comparing spreads on closer maturities (with Nigeria 2032 and 2047 closing yesterday at Z-spreads of 418bps and 460bps respectively) it would appear Nigeria had to pay slightly more.
However, given the rise in US Treasuries and increased African Eurobond supply (after Egypt’s USD4 billion issuance and planned sales by Ghana, Kenya, Angola and Cote d’Ivoire in Q1 2018), Nigeria probably paid a fair price in the light of market conditions.
Given fiscal plans to refinance a portion of outstanding Nigerian Treasury Bills (NTB), there is scope for a normalisation in the NGN yield curve (from the largely flat pattern) as softer paper supply exerts downward pressure on short-dated maturities.
Africa’s biggest oil producer is struggling to raise enough revenue amid the worst economic slump in about 25 years. Gross domestic product expanded from a year earlier in the three months through June after contracting for the previous five quarters.
Acute dollar shortages that were exacerbated by capital controls in 2016 sent investors fleeing and left the economy bleeding.
However, Nigeria is regaining its allure for international traders, thanks to the rise in Brent crude prices and an easing of dollar shortages, which are helping Africa’s largest economy recover from its worst slump in 25 years.
More dollars piled into Nigeria than exited through the Central bank in 2017, as inflows outpaced outflows for the first time since 2012, according to data compiled by BusinessDay and sourced from a report on the apex bank’s website that put net flows at $12 billion.
An equal share of increased inflows and reduced outflows led to the positive net flow in 2017, as inflows surged 15.59 percent to $41.7 billion from a seven-year average of $36.1 billion within 2010-2017, while outflows fell identically by 15.43 percent to $29.1 billion from an average of $34.4 billion.
That’s the first positive net flow since 2012, when inflows outpaced outflows by $10.4 billion.
The rise in external reserves and relative exchange rate stability confirm improved dollar flows to the CBN coffers.
LOLADE AKINMURELE
