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Nigeria Locked Out of Dollar Bond Market as Yield Spread to US Treasuries Soar

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More than a quarter of emerging market countries including Nigeria have found themselves effectively locked out of international bond markets as the extra yield investors demand for bonds compared to US Treasuries has soared.

According to research by Goldman Sachs, around 27 per cent of emerging market sovereigns currently have spreads on yields compared to equivalent US Treasuries of above 9 percentage points, the level at which market access typically becomes restricted.

Investors say that countries which had plans to issue bonds have avoided coming to market, such as Nigeria and Kenya, whose yield spreads to USTs climbed to 8.95 and 8.4 percentage points respectively in March.

“Restricted access to debt markets will push countries to take tough measures at a time where inflation is already high and they’re already struggling with low growth,” said Sara Grut, an emerging markets sovereign credit strategist at Goldman Sachs.

“The key question for these countries is, what will be the thing to help them regain market access? One could be that they do very uncomfortable, unpopular reforms, or we see much stronger global growth that improves market sentiment.”

Nigeria’s headline inflation rate rose to 21.91 percent in February 2023 compared to 21.82 percent of January 2023, indicating an increase of 0.09 percent points.

Growth fell to 3.10 per cent in 2022 from 3.40 per cent in 2021 according to new GDP results from the National Bureau of Statistics.

Nigeria had $15.6 billion in commercial dollar denominated bonds outstanding as at December 2022, according to data by the Debt Management Office or DMO.

Total external debt which includes multilateral and bilateral loans from Exim Bank of China, the World Bank Group and the African Development Bank totaled $41.69 billion in December, data seen by MoneyCentral shows.

Countries which face restricted access to international debt markets may be forced to turn to the IMF, private market debt sales and currency devaluations.

Emerging market governments have issued $54bn in sovereign bonds in the first quarter of this year, an increase of around 60 per cent compared to the previous year.

However, nearly 70 per cent of this was completed in January, before market confidence was dented by the collapse of Silicon Valley Bank, forced sale of Credit Suisse and turmoil at US regional banks.

Meanwhile, continued elevated inflation, high interest rates and sluggish growth in countries around the world may further limit access for distressed sovereigns.

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