Nigeria’s oversubscribed Eurobond on Wednesday showed that investors will flock to the country’s dollar assets. But when it comes to naira ones, they’re staying well away.
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Nigeria got around $3 billion of orders for its $500 million of notes, according to a person familiar with the matter, who asked not to be identified. High demand for the deal, a tap of an existing $1 billion bond due in 2032, allowed book-runners Citigroup Inc. and Standard Chartered Plc to price it with a 7.5 per cent yield after initially offering 7.8 per cent. The yield fell further to 7.37 per cent on Thursday, before rising 1 basis point to 7.38 per cent as of 8:19 a.m. in Lagos.
Rising oil production and an economy poised to come out of recession this year are enticing traders to buy Nigerian dollar-denominated bonds. Yet they’re avoiding naira assets because capital controls, a managed currency and severe dollar shortages mean they may struggle to exit positions in local bonds and stocks.
“The Eurobond was positive for Nigeria,” said Lutz Roehmeyer, a fund manager at Landesbank Berlin Investment GmbH, which owns Nigerian dollar debt but has sold all its naira securities. “But it is almost impossible to unwind naira trades. That’s why we completely exited local bonds. As long as foreigners like me think in this way, nobody will invest in the local currency.”
Nigeria’s Eurobonds have earned investors 16 per cent in the past year, beating the average for emerging-market sovereign notes of 8.4 per cent. Holders of naira-denominated notes lost 38 per cent in dollar terms during that time, the most after Egypt among 31 emerging markets tracked by Bloomberg.
It’s a similar story with Nigerian stocks. They’re the world’s worst performers in the past year in dollar terms, losing 35 per cent.
Little will change until Nigeria lets its currency drop, according to Roehmeyer. The central bank has kept the naira at around 315 per dollar since August, while the black-market rate has plummeted to 383 as the dollar squeeze worsens.
“There’s an easy fix,” said Roehmeyer. “You just have to look at what Egypt did when it floated the pound in November. That would do the trick in Nigeria. If the naira was free floating, like in Egypt it would overshoot, maybe to 450 per dollar or even 500. Then, it would appreciate to about 400.”