Nigeria has been one of the cleverest predators of the Bond market. Last Tuesday it showed its teeth again when a team led by the Finance Minister, Kemi Adeosun went to London to tickle the fear weary Bond guzzlers. This was a non deal road show, because if the federal government of Nigeria have to issue a bond as many thought they had gone to do, they will need to get a parliamentary approval before they go ahead with it. So the meeting in London Tuesday with Bond investors is not about the Bond issue but about testing the very murky waters. In any case, the finance minister said that would probably happen much later in the year.
Having said that, Nigeria has a budget deficit now, (the federal government say they are targeting a deficit of no more than 2.1percent of GDP or N2.2 trillion) the question is how do we plug that gap if there is apathy when the country issues? In our reckoning there are several things that could be done. The government could raise debt which is Bonds, in local currency. The second alternative is to sell some of the resources or assets that the country have, maybe, the refineries, which has come more under spotlight in recent times-so sell the refineries, sell licence into oil and gas blocs, telecoms spectrum licence –sell something to raise money. The third is to enter into some form of strategic alliance where the private sector will spend their own money then recover it in form of taxes and other things, over the years-for instance if you want to build roads, rails, airports or something, you call in the private sector people to build it, operate it and transfer when they have recovered all their money after, maybe 10 to 20 years. So there are different structures you could use depending on the type of gaps you want to fill.
At this point, we don’t think that the government has narrowed down to a particular solution but they are keeping in touch with the market with the recent talks held in London with Bond investors-which is the right thing to do. Recall that under the former minister of finance, they organised once or twice a year a non deal road show to keep the market abreast of developments. And don’t forget that these are creditors-international creditors. So for this road show- even if it is a non deal road show-we think it was long over-due. It is already more than a year into the government and it’s about time they tell international investors of the progress the country is making and its future plan.
We are certain the country did not engage well enough with the international investors all of last year. This London trip is therefore reassuring. Let’s put it in a lay mans term-If someone is owing you money and you have not heard from him in 18 months and you are hearing different bad news about him, when he comes eventually to visit to tell you that he is still okay, you will definitely get a bit reassured or even excited. That reassures you that your investment is not in the wrong hand. So we think it is important that they have done this. It is a good initiative. But it would have been much easier on the finance minister, if there is some form of clarity from the Central Bank of Nigeria’s (CBN) about its much touted “flexible exchange regime” before the trip. There is still a lot of uncertainty around that and the international community want answers.
But let’s not forget, the minister of finance is in charge of fiscal policy and the Central Bank of Nigeria is in charge of monetary policy. We think it also shows some level of independence. When the monetary policy is in place the CBN can communicate that to the market.
In all, there also needs to be clarity on what the critical infrastructure the country will need to focus on from among the items- roads, rails, agriculture, oil and gas infrastructure in relation to gas flaring. It is difficult for us to say where they should spend the money. But we want to believe this government have a lot of smart people who have done that analysis and want to be confident that they will do what is right. We think the moral leadership that President Mohammed Buhari is providing is comforting and reassuring that the government would do the right thing. This is not just about the president himself; it also extends to the Vice President, Yemi Osinbajo and the cream of people that surrounds him.
But if the federal government eventually issues the Bond, this is how it will affect the private sector; let’s assume the federal government comes out to issue a 10-year Bond or 20-year Bond-they have 10-year Bond already don’t forget-if they want to extend the benchmark or the curve they could issue 2 Bonds-one for 10 years and the other for 15 years and maybe another one for 20 years, it extends the curve. It means that there is going to be a price point for a new 10, 15 and 20 year issue-If Nigeria therefore comes in with a new 10 year instrument at 10 percent, it is unlikely that any Nigerian corporate coming into the market at the same time will trade inside 10 percent. In simple terms, you are riskier than the sovereign. Your debt will be the sovereign plus the mark up.
So what should concern the finance officials and the country as a whole is what pricing they will expect going into the market today. With the uncertainty around the foreign exchange market, the problems around the Niger Delta, the country’s oil production level which has dipped below 1 million barrels per day currently because of the attacks in the Niger Delta and the still existing situation in the Northern part of the country, even though considered as largely under control, there are a lot of risk factors that investors would have to rap their heads around. Again, that certainly would be built into the risk premium that will be added to pricing.
Yes, debt is a tested market for Nigeria, it is a market the country should re-visit, whether it is in US dollar, Euro or in any currency for that matter, the question is the timing. Do you want to enter the market when there is a lot more certainty, when investors are a bit more comfortable or at this time when the market is saying, we dislike the uncertainty surrounding the country?
The govandbusinessjournal.com.ng EDITORIAL
