Nigeria, Africa’s largest economy, has been going through one of the worst recession in recent times; hit by falling oil prices, the country has registered negative growth for five consecutive quarters.
However, things seem to be looking up slightly for the West African nation; its economy shrank by only 0.52% in the first quarter of 2017, and while it is not quite in growth territory yet, it is a tangible improvement compared to previous quarters.
The Minister of Budget and National Planning, Sen. Udoma Udo Udoma, reaffirmed this idea recently when he told the local press that Nigeria would come out of recession before the end of this years.
Higher oil prices combined with the government promises of macroeconomic reforms have improved investors’ sentiment towards the country. This shift in mood was sensed by the Nigerian government, which spotted a window to return to the international capital markets in February this year with a US$1bn bond, which carried a 7.87% coupon.
Their assessment quickly paid off because the transaction was eight times oversubscribed. This is particularly relevant, because for almost a year the sovereign had tried but failed to raise capital via the debt markets.
Nigeria also sold a US$300mn diaspora bond in late June, targeting wealthy Nigerians living abroad, which also proved to be a success with investors as the transaction was 130% oversubscribed.
A sukuk issuance is set to be next in Nigeria’s pipeline as it seeks to diversify its investor base.
And the bond bonanza will continue beyond that, as the government has announced that it intends to borrow heavily in an effort to bolster the economy, through balancing the deficit and spending a considerable amount on infrastructure.
So, as the government lays out its funding plan, will other corporates or institutions take advantage of investors’ positive sentiment towards Nigeria and start tapping the markets again?
According to Kobby Bentsi-Enchill, Head of Debt Capital Markets at Stanbic IBTC Bank PLC, “the government certainly does lay the groundwork for corporate issuance, however, as was the case between 2011 and 2013, we are likely to see the government being followed by Financial Institutions (banks) first and foremost, and then perhaps a handful of corporates might also get into the fray.”
That certainly was also the case in June, when Zenith Bank successfully issued a five-year Eurobond worth US$300mn. The transaction was subscribed 400% - the highest for non-sovereign and non-supranational company in sub-Saharan Africa. The bond was issued at par with both coupon rate and yield to maturity rate priced at 7.375%, 50bp tighter than the sovereign.
United Bank for Africa (UBA) debut US$500mn Eurobond was also a success, 240% oversubscribed. The five-year notes were issued with a coupon rate of 7.75%, priced at an effective yield of 7.875% and par with the sovereign bond.
After the success of both the government bonds and the banks, other real sector corporates might contemplate international issuance - FMCG, O&G, and Telecoms offer key prospects, Bentsi-Enchill noted.
What About the Local Markets?
Both sovereigns and corporates have been driven towards the international markets by the low patronage and the high cost of raising capital from the local markets - a trend that is expected to continue. This is mostly due to the outlook for Africa’s largest economy improving incrementally and investors appearing to be excited about the government macro reforms aimed at reviving the country’s economy. But these reforms are yet to have an impact on the local capital markets, Bentsi-Enchill conceded.
According to the banker “whilst regulatory reforms have come a long way, a simplification and fast tracking of the approval process will go some way towards bolstering the domestic debt market. The regulations governing investment activity by pension funds also need to be looked at and streamlined in order to afford a greater level of flexibility for fund managers to operate and run optimally managed portfolios”.
There’s even a longer way to go in terms of attracting international investors into Nigeria’s shore, a key aspect that would boost the capital markets and, subsequently, the country’s economy.
For Bentsi-Enchill, right now the most important aspect “has to do with FX liberalization policy, which has been topical for the last 12 to 18 months. The government has to continue on the path to full liberalization to engender confidence in the market, which would then pave the way for a greater level of participation by international investors,” he concluded.
After entering its first recession since 1991, Nigeria is slowly but surely setting on recovery path, a fact that has not gone unnoticed by international investors, thrown by low-interest rates in the developed world, have indulged in the recent issuances of the banks and the sovereign, paving the way for more corporates to follow suit.
However, the government still has a lot do if it also aspires to attract foreign investment into its local capital markets a move that will prove vital in its quest for economic recovery.
