Nigeria’s Eurobond Success: Bright Spot to Slower Capital Importation

The National Bureau of Statistics (NBS) recently published Q4:2016 capital importation report. The Bureau estimated total value of capital imported into Nigeria in the period to be US$1.5m, implying  15.0% and 0.5% decline Q-o-Q and Y-o-Y respectively. The slowdown in capital importation in the last quarter was as a result of the decline in portfolio investments (FPIs) which counteracted the impact of the increase in Foreign Direct Investments (FDIs) and other investments. Q4:2016 decline in capital importation was in contradiction of the performance recorded in Q3:2016 when Q-o-Q capital imported increased 74.8% in reaction to the adoption of the flexible exchange rate policy by the Apex Bank. A further breakdown of the Q4:2016 capital importation numbers showed that portfolio investments in bonds declined from US$369.0m in Q3:2016 to US$25.4m whilst investments in equities dipped from US$201.1m in Q3:2016 to US$176.5m.

In addition, the Y-o-Y capital importation numbers fell 46.9% to US$5.1bn in 2016 from US$9.6bn in 2015 – the lowest capital importation numbers recorded in almost a decade. FPIs declined faster in 2016, down 69.8% Y-o-Y relative to 27.8% decline in FDIs. Implications are that protracted liquidity crisis, market fragmentation, price misalignment and the widening spread between the interbank and parallel markets rates continue to constitute impediments to capital importation in Nigeria.

Interestingly, the federal government successfully raised a US$1.0bn Eurobond during the week. The Eurobond was issued at a 7.9% yield with a maturity date of FEB-16-2032. Despite rating downgrade from “B+” to “B” by S&P  in Q3:2016 and a recent downgrade by Fitch ( long-term foreign and local currency issuer rating) to “B+” with a negative outlook, the Eurobond was 7.8x over-subscribed. This was largely in contrast to consensus expectation, given the protracted liquidity crisis in the domestic currency market which has weighed heavily on capital flows. At 7.9% yield, we imagine that a stable outlook for crude oil prices and the considerable gains recorded against militancy in the Delta region, which pushed back output level to 1.9mbpd from 1.6mbpd, may have buoyed interest in the issue. Overall, we think the success of the Eurobond is positive for fiscal policy given the need to finance the 2017 budget and restore the economy to the path of growth.

January Inflation Estimate
Also, the NBS is scheduled to release inflation numbers for the month of January 2017 next week. We forecast Y-o-Y headline inflation rate to inch higher to 18.7% from 18.6% in December 2016 due to a relatively lower base despite projected slower month-on-month (M-o-M) change to 1.0% from 1.1% in December 2016 as the impact of yuletide season on prices wears off. Energy prices were also relatively stable in January save for price of diesel and kerosene which inched slightly higher whilst the exchange rate at the interbank remained largely steady in the period. All variables unchanged, we project headline inflation to begin to ease from February 2017 due to high base in the corresponding period. Yet, we think prices may edge higher if the naira further depreciates as the feedback effect on energy (petrol and Diesel) prices may fuel further hike in general price level.