Investors are demanding much more from Nigeria to be holders of its debt.
That’s after the country’s risk premium widened to the most in 2019, a sign that investors risk perception of Nigeria is at an all year-high.
Analysts say Nigeria’s risk perception has heightened on the back of lower oil prices and a fresh lawsuit against the federal government by an Irish gas company, P&ID, which has been awarded the right by a British court to seize Nigerian assets worth $9bn.
The Central Bank said Monday that it will “defend the reserves” but that has not stopped investors from fearing the worst which could mean a $9 billion or 20 percent set back to current external reserves of $44 billion.
“The P&ID $9bn claim was like a sucker punch to investors who were already concerned about lower oil prices,” said Tajudeen Ibrahim, head of research at investment bank, ChapelHill Denham.
“The risk premium is likely to widen further if oil prices continue falling, because the CBN will be forced to raise rates to compensate for the additional risk investors are taking,” Ibrahim added.
A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield.
An asset’s risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment.
For sovereign bonds, the US bond is considered as risk-free-and as such another sovereign’s risk premium can be determined by comparing the yields on the sovereign’s local bond to that of the US treasury.
The US ten year treasury yielded 1.6 percent Monday while investors demanded for as high as 14 percent to hold Nigeria’s one year Treasury bill. That leaves the risk premium at 12.4 percentage points, the highest spread this year.
It means investors are demanding an extra 12.4 percent yield to hold the one year Nigerian treasury bill.
Nigerian dealers raised their secondary-market bids for one-year treasury bills to 14 percent from 11 percent last week, traders said on Monday.
The bid-offer spread on the paper doubled to 200 basis points, traders said, adding that some investors had bid for bills at 16 percent on Friday, when news first broke that a British court had ruled in favour of P&ID.
The federal government says it has instructed its lawyers to appeal against the judgment.
In a statement released on Friday evening, Dayo Apata, the solicitor general of the federation and permanent secretary, federal ministry of justice, said Nigeria will seek for a stay of execution.
Meanwhile, oil prices remained below the federal government’s $60 per barrel budget peg for the third week running Monday.
Brent crude, Nigeria’s benchmark grade, sold for $59 per barrel as at 6pm Monday.
LOLADE AKINMURELE
