Falling yields mark a boom in Nigeria’s bond market

Nigeria’s debt market continues to boom with growing volumes in the local debt market and inclusion in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) from 1 October as Africa’s second entrant after South Africa, Yesterday (31 Oct) the Debt Management Office (DMO – www.dmo.gov.ng) was reported by local newspaper This Day as saying it had received bids totaling NGN1.7 trillion ($10.8 billion) for Government debt in the 12 months to Sept 2012 and had issued a total of NGN852bn in debt over the period.
Nigeria has been tipped by many leading research houses and banks as one of the most promising African markets for local-currency debt, after strong performance for the naira (NGN) against the US dollar ($) and strengthening bond prices and falling yields.
Demand picked up strongly after JPMorgan announced in a note to clients on 15 Aug that its GBI-EM Index may include Nigerian debt maturing in 2014, 2019 and 2022 in a gradual inclusion starting 1 Oct and finishing by year-end. The bonds, with a market valuation of $3.2bn as of August, may represent about 0.59% in the index. JP Morgan sub-Saharan Africa economist Giulia Pellegrini was quoted in an article on Bloomberg as saying about $170bn of assets are benchmarked to the JPMorgan index. Market estimates are for an inflow of up to $1.5bn into the market by funds tracking the index. Central Bank of Nigeria (CBN) Governor Lamido Sanusi lifted a requirement in 2011 for foreign investors to hold local-currency debt for at least 1 year and this was proving successful in attracting investors and improving liquidity, said Pellegrini.
Nigeria is rated B+ at Standard & Poor’s (BB- Fitch), along with Venezuela and Zambia, four steps below investment grade and the outlook is “stable”. Bloomberg says the daily trading of naira amounts to as much as $200mn, according to Citigroup Inc., compared to about $14bn of South African rand (ZAR) being traded daily, according to a 2010 survey by the Bank for International Settlements. “The country’s external buffers are gradually being restored,” Razia Khan, the London-based head of Africa research at Standard Chartered, wrote in a 18 Sept note to clients. “It is all important that this process continues for Nigeria to be able to safeguard both price stability and growth should these be put to the test by weaker oil prices in the future.”
Nigeria’s sovereign bond market is put at $23bn but secondary market trading is still a fraction of trading in South African foreign debt. Angus Downie of Ecobank says the daily trading in government securities could grow by up to $50m from previous levels of $400m/day with foreign investors likely to remain significant, and his colleague Paul Harry Aithnard, Group Head of Research at Ecobank, says that the ZAR was previously seen as the proxy for Africa, but the NGN is attracting investors looking for an alternative. Samir Gadio, emerging markets strategist at Standard Bank, said: “It’s now seen as a market that can’t be ignored internationally and one of the frontier markets where you need to have a position.”
Yields on Nigeria bonds have been falling as investor interest grows. There has been some profit-taking but inflation prospects are improving and reserves are being grown. However, there is still considerable scope for more deepening in the Nigerian market, and private banks are still avoiding some sectors, including agriculture and small-scale construction. In January 2011 the Nigerian Government issued a 10-year $500m Eurobond at a yield of 7% and carrying a coupon of 6.75%, but by mid-October 2012 the yield had fallen to 4.57% according to the DMO and the closing price was $114.79. Yields are also down on debt from Gabon, Namibia and Ghana.

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