Nigeria’s Fall Deeper Into Junk Risks Africa’s Best Bond Rally

by Emele OnuPaul Wallace

  

Workers sit beside campaign posters of Nigerian President and presidential candidate of ruling People's Democratic Party (PDP) Goodluck Jonathan in Lagos, on March 4, 2015. Photographer: Pius Utomi Ekpei/AFP/Getty Images

(Bloomberg) -- A rally that made Nigerian bonds the best performers in Africa in March risks coming to an end as the credit rating of the continent’s biggest economy slides deeper into junk.
Standard & Poor’s lowered its assessment on Nigeria one level to B+, four levels below investment grade, on March 20, while changing its outlook to stable from negative. Naira bonds returned 2 percent this month, the most among 31 emerging markets after Russia and the Dominican Republic, according to Bloomberg indexes. Naira debt lost 5 percent in February.
Nigeria’s economy is sputtering under the weight of a more than 50 percent plunge since June in the price of oil, its main export, and an insurgency by Islamist militants before elections on March 28. While the central bank has stemmed a slide in the naira with 17 foreign-exchange restrictions since September, policy makers may devalue the currency after the vote, so it doesn’t make sense to buy local bonds, according to Alan Cameron, an economist at Exotix Partners LLP in London.

“A downgrade worsens public and investor perception of the
economy, which is already being hit,” Kunle Ezun, an analyst at Ecobank Transnational Inc. in Lagos, said by phone last week. Borrowing costs will increase because of the negative signal it sends, he said.
Nigeria’s currency lost 18 percent against the dollar in the past six months, the steepest decline among 24 African currencies tracked by Bloomberg after the Zambian kwacha. It touched an all-time low of 206.32 per dollar on Feb. 12. The naira advanced 0.1 percent to 199.05 as of 8:43 a.m. in Lagos on Monday.

‘Diminished Rapidly’

The International Monetary Fund cut its 2015 growth forecast for Nigeria to 4.8 percent on March 5, from 6.3 percent last year and about half the average rate over the past 15 years. Nigeria’s central bank has cut foreign-exchange reserves by 13 percent this year to $30.1 billion to defend the naira.
Depleting foreign-exchange reserves to their lowest level since 2005 means the central bank’s “capacity to intervene in the currency market has diminished rapidly,” David Faulkner, a Johannesburg-based economist at HSBC Holdings Plc, said in a note on March 20. “Risks to the currency remain elevated.”
Electoral officials delayed a vote set for Feb. 14 after President Goodluck Jonathan’s security adviser said the army couldn’t guarantee voters’ safety in the northeast, where a six-year insurgency by Islamist group Boko Haram has killed more than 13,000 people. Jonathan will face former military dictator Muhammadu Buhari in what is set to be the closest election since Nigeria ended military rule in 1999.

‘Under Pressure’

“The tightly contested general elections may pose risks to Nigeria’s external position,” S&P said in a March 20 statement. “The exchange rate and monetary policy could continue to come under pressure due to the fall in oil prices, political risks, or changes in investor risk appetite.”
Nigeria is among other oil producers being downgraded by S&P, the country’s finance ministry said in a statement on March 20. The ratings company’s outlook for 2015 growth is better than IMF forecasts and being driven by non-oil industries, which will continue to support the economy, the ministry said.
The S&P reduction puts Nigeria on par with Rwanda, Kenya and Zambia. Yields on Nigerian dollar-denominated bonds due July 2023 have been trading at a premium to Kenya debt maturing in June 2024 since mid-December.
The naira has mostly traded within a range of 198 to 200 per dollar on the interbank market since mid-February. On Feb. 18, Central Bank of Nigeria Governor Godwin Emefiele scrapped twice-weekly foreign-exchange auctions. While that effectively devalued the currency for the second time in three months, it allowed regulators to focus intervention efforts in the interbank market rather than selling dollars at subsidized rates at the auctions.

Limits Reached

The latest efforts followed a series of other measures introduced by regulators, including a system that prevents local dealers from buying foreign exchange without proving it’s needed to fulfill planned transactions, while also preventing money changers from buying dollars from banks.
“After three years of high interest rates and nine months of low oil prices, we think the limits to conventional monetary policy have been reached,” Cameron of Exotix said in an e-mailed note on March 19. “Investors should therefore expect more unconventional policy measures, as well as an exchange-rate devaluation, in the months ahead.”
The Monetary Policy Committee will maintain its benchmark lending rate at a record 13 percent after its meeting on Tuesday, according to all 11 economists surveyed by Bloomberg. It increased interest rates by one percentage point in November, the first increase in three years.
“Investors are waiting for the election to pass,” Joseph Rohm, a money manager at Investec Asset Management, which oversees $107 billion, said by phone from Cape Town on March 20. The downgrade will probably push yields higher, which may eventually help to lure investors back to Nigeria should the currency be devalued, he said. “Once you see the naira devalue further you’ll see foreign portfolio flows back into Nigeria again.”