Nigeria’s bond market is already betting that the nation’s next leader — whoever it is — won’t be able to repair the shambles left by the previous administration.
Africa’s most populous country is in the midst of a fiscal crisis, driven by soaring debt service payments that will soon cost more than the government generates in revenue. The three main candidates vying to replace outgoing President Muhammadu Buhari at an election on Saturday have promised to right the ship, but bond performance suggests investors aren’t buying it.
Nigeria’s dollar bonds have declined 6.8% over the past month, exceeding the average drop of 1.9% in a Bloomberg index of emerging-market peers. The extra yield investors demand to hold Nigerian dollar debt rather than US Treasuries has risen by about 136 basis points to 817 basis points. That’s less than 200 basis points from levels traders considered “distressed.”
“Nigeria’s current economic troubles are the culmination of a multiyear slide that began under previous administrations and accelerated under President Buhari,” said Patrick Curran, a senior economist at Tellimer Ltd., a firm that specializes in emerging-market research. “The key difference is that with debt service absorbing over 100% of federally-retained revenue, there is a far shorter runway to turn things around.”
Six Charts Show the Challenges Facing Nigeria’s Next Government.
Parting Gift
Under Buhari, Nigeria’s total debt stock exploded more than six-fold to about 77 trillion naira ($167 billion), or 40% of GDP. Much of that came in one fail swoop at the very end of his tenure, when he tucked an extra $50 billion onto the state debt pile, leaving future administrations to pay for the overdrafts his government took from the central bank over its eight years in power.
Concerns over economic stability have put the naira under pressure, and it fell to a record low of 461.78 against the dollar last week in the official market, where the rate is tightly controlled, and 755 on the widely-used black market. The cost to insure Nigeria’s debt against default using credit default swaps has also jumped, from 644 basis points at the beginning of the month, to 728.
Interest in companies has remained one bright spot, with the NGX All Share Index trading near its highest levels since 2008, although it’s still below last year’s levels in dollar terms.
Candidate Pledges
The World Bank has said that the next president should quickly implement reforms that Buhari neglected to enact, including quashing a multiple exchange-rate regime that is repelling investors, removing import restrictions and lifting fuel subsidies that cost most of what it makes pumping crude.
Nigeria’s oil sector, which accounts for most of its export earnings, has suffered under Buhari. Production fell to a multidecade low last year — at about 1 million barrels a day, roughly half what it was in early 2020 — with criminal syndicates in the Niger Delta stealing up to a fifth of the country’s output every day. Daily production has since rebounded to 1.6 million barrels.
The three leading presidential candidates — Bola Ahmed Tinubu, leader of the ruling All Progressives Congress, former Vice President Atiku Abubakar of the opposition Peoples Democratic Party and ex-governor Peter Obi of the Labour Party — have each made similar, largely market-friendly pledges to fix the economy, including cutting the fuel subsidy.
Obi, an outsider candidate who’s the surprise leader in multiple polls, has promised to reprofile the nation’s debt if elected by extending maturities. His victory would be “the best outcome for investors given his market-friendly orientation,” said Curran. A Tinubu win would be the worst, “given his more interventionist approach and greater likelihood of continuity with some of Buhari’s failed economic policies.”
Credit Rating
Moody’s Investor Service cautioned that whoever wins will struggle to carry out urgent fiscal reforms because of “social and institutional constraints,” according to a report last month announcing its downgrade of Nigeria’s long-term foreign-debt rating to Caa1 from B3. That puts it on par with Pakistan, which has been pleading for debt relief from rich nations since catastrophic floods last year.
An election with no clear leader and a subsequent run-off would likely further delay any reforms, Neville Mandimika, emerging-market sovereign strategist at Morgan Stanley & Co Intl Plc, said in a note to clients.
“Investors and rating agencies will be keen to see how quickly costly policies like the fuel subsidies can be amended or removed,” Mandimika said. Any delay “will likely lead to S&P and Fitch following suit and downgrading.”
In London, Vanguard Asset Services’ Nick Eisinger sees room for optimism.
“Things can turn work out well for Nigeria,” the co-head of emerging-market active fixed income said. “The way I thought about Nigeria is the country is so badly run at the moment, a new government can’t do worse.”
