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Nigeria Could Tap International Debt Market as U.S Inflation Cools

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The gradual cooling of inflation in the United State that is fueling expectations Fed is about to rein in on aggressive cycle of hikes paves the way for the governments of Nigeria and emerging market to raise capital from the international debt market.

A weaker dollar makes the assets of developing countries like Nigeria and Emerging markets more attractive, as foreign investors hunt for higher yields in those environments, which bolsters profit margins.

Additionally, an ultra-loose monetary policy by the U.S helps cut debt serving costs of governments and companies with dollar denominated debt and increases their real income.

“Ordinarily, emerging markets should benefit from a weaker dollar as investors reduce demand for greenbacks given expectation of lower treasury yields in the U.S.,” said Gbolahan Ologunro, portfolio manager at FBN Quest.

The consensus rate hikes by global central banks that ballooned borrowing costs forced the Nigeria’s government to suspend the issuance of its planned $950 million Eurobond in 2022, opting for the domestic market and “Ways and Means

The finance minister also hinted that the Federal Government has no plan to raise funds from the international debt market in 2023.

Nigeria’s 2022 major highlight in the Eurobond market was the 8.50 percent $1.25 billion 7-year Eurobond issuance, according to data compiled by Meristem Securities.

Analysts say rising borrowing costs could prevent the government from borrowing from the public market and the controversy surrounding the “Ways and Means’’ suggests the government’s best bet is to seek funding in the international market as interest rates are gradually ebbing.

“Notwithstanding the risks, the recent rejection of the proposal to restructure the Way and Means balance by the lawmakers could put more scrutiny on the FGN’s overdraft from the CBN,” said analysts at Meristem Securities.

“The generally rising concern around debt sustainability could also be an incentive for investors to price treasury instruments at a higher yield, and we think this would have a higher effect on the market direction together with the potential pricing in of political risk. Thus, we expect the fixed income yield to rise in 2023, albeit at a gradual pace,’’ said analysts at Meristem Securities.

The upper chamber of the National Assembly has declared it is ready to approve the N23.7 trillion debt restructuring request made by the President Muhammadu Buhari, (Retd.)  in December last year.

More interestingly is that Nigeria’s public debt burden may hit N77 trillion if the National Assembly agrees to sign the Ways and Means Advances request by the executive arm.

The Debt Management Office, DMO, has announced plans to raise up to N1.2 trillion through FGN bonds in the first quarter of the year 2023.

Ologunro, however, opined that the pass through impact of this on the currencies will be dependent on country specific factors ranging from structure of foreign exchange market, state of liquidity and vulnerability of macro conditions to external shocks.

Of course, an opaque or nebulous foreign exchange regime that stoked a severe dollar scarcity and inflation combined with heavy subsidy payment have fueled capital flights, which makes the country vulnerable to macroeconomic headwinds.

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