Strategy Note /

Nigeria's shelved eurobond raises chances of higher local yields

  • Nigeria has scrapped its plans for a June eurobond due to high market pricing. Cote D'Ivoire and Kenya have done similar

  • Increases the likelihood of higher local yields as the government ramps up local borrowing

  • Local FI investors should stay short. Equity investors can take positions in banks

Nigeria's shelved eurobond raises chances of higher local yields
Janet Ogunkoya
Janet Ogunkoya

Senior Research Analyst

Tellimer Research
15 June 2022
Published by

Nigeria’s government is scrapping plans for a eurobond issuance in June (announced in April) due to unfavourable market pricing and missed approval deadlines. The US$950mn issuance from Nigeria would have been the last international bond from its 2021 budget, after the authorities issued US$1.25bn in March this year.

The announcement comes only a few weeks after the Ivorian government cancelled its US$1bn international bond plan for similar reasons, and instead opted to sell bonds in the regional West African Economic and Monetary Union (WAEMU) Government Securities Market. Kenya said recently that it too was cancelling plans to issue a US$1bn eurobond, after much contemplation, and would instead opt for a loan from a syndicate of banks.

The cancelling of eurobond plans comes as no surprise to us – we had predicted in a recent note that the state of global markets, rate hikes and the stronger dollar could see more sovereigns opt for local borrowing rather than international market issues.

Stronger dollar, increasing eurobond yields is discouraging international bond issuances from the continent

What this means is that sovereigns will now have to seek alternatives to finance their widening budget deficits. For Nigeria, the federal government will have to increase funding of the NGN7.4tn (US$17.6bn) projected budget deficit for 2022 through local borrowings (via treasury bills and bonds) while also possibly seeking alternatives in multilateral loans.

The time for higher interest rates on local paper could be drawing closer, because of: 1) increased local borrowing (to make up for the cancelled eurobond); 2) expectations for more rate hikes to curb inflation; and 3) persisting cash reserve ratio (CRR) debits on banks.

However, analysts' calls for higher yields is tainted with uncertainty after the central bank's recent surprise rate hike failed to deliver a stronger increase in yields as many expected (and caused a selloff in equities, more below). The reason is that there is still ample cash in the system that strengthens demand at the auctions and keeps a lid on any rise in yields.

That said, the factors highlighted above are expected to push yields higher in H2 22, at least to levels seen last year. As a result, local investors are advised to stay short (near-cash) and position for higher yields in the short to medium term.

Yields are yet to mirror central bank's recent surprise rate hike impact

On the other hand, we expect the higher yields will result in a slowdown in the Nigerian equity markets. As we highlighted in a previous note, Nigeria had been the best-performing equity market globally in terms of US$ returns for the opening five months of the year (it is still up 25% ytd, but Lebanon is now top of the table with 43%). Part of the driver for Nigeria's impressive performance had been the low yields in the FI market, which left local investors with little choice but to increase equity exposure in their portfolios.

But as yields rise, we expect a slowdown in the market rally (and possibly a reversal), as local investors reshuffle their portfolios and opt for the fixed income market. In addition, foreign investors, who were once major participants in the equity market, have continued to steer clear of Nigeria due to persisting FX challenges which began in 2020.

Local equity investors can also find solace in banking stocks, as they are likely to benefit from the rise in interest rates. As my colleague Rahul Shah notes in his report, higher interest rates have both positive and negative effects on banks, but, for Nigerian banks, it is broadly positive as the credit system is not over-heated – banks are broadly net long in FX assets, etc.

Our top bank stock picks are GTCO and Zenith.