Smooth elections in
Nigeria could differentiate it from other political hot spots in the
region and trigger renewed frontier investor interest in its Eurobond
and equities.
Appetite for
Nigeria’s $500 million debut Eurobond has been lacklustre since it
launched two months ago, while a rally in the stock market in the first
few weeks of the year has petered out, partly due to nervousness ahead
of the April elections.
Turmoil in North
Africa and the Middle East, as well as a brewing conflict closer to home
in Cote d’Ivoire, has heightened awareness of political risk and
dampened appetite for emerging markets in recent weeks. Nigeria has been
no exception.
Its 10-year
Eurobond, issued on January 28 at a 7 per cent yield, has traded broadly
flat at 6.9 per cent, despite being 2.5 times oversubscribed at launch
and Nigeria’s ability to service the debt, surprising some analysts.
April’s
presidential, parliamentary, and state governorship elections are set to
be fiercely contested. Incumbent President Goodluck Jonathan is
considered the front-runner but faces tough competition in the
mostly-Muslim north from former military ruler, Muhammadu Buhari, whose
supporters are hoping they can force a run-off.
The ruling People’s
Democratic Party (PDP), which has dominated Nigerian politics since the
end of military rule 12 years ago, is expected to see its strong
parliamentary majority weaken and to lose control of some of the
country’s states.
“The Eurobond is
likely to be more sensitive to perceptions of stability … We expect
trading to be fairly cautious in the run up to elections, with potential
further upside if things go smoothly,” said Business Monitor
International’s Alan Cameron, sub-Saharan African analyst.
Run-off a risk
If Mr. Jonathan does
not win a clear mandate from the first round on April 2 and elections
go into a run-off, analysts say spreads could widen, relative to
risk-free U.S. treasuries.
“In the unlikely
event that it comes down to a run-off, the country’s credit spread will
probably widen, since such a possibility has not been seriously priced
into the bond,” said Samir Gadio, emerging market strategist at Standard
Bank.
Cote d’Ivoire’s
disputed election led the country to a default on its $2.3 billion
Eurobond, now trading at 36 per cent to face value. Yields rose from
under 10 per cent ahead of Cote d’Ivoire’s first round presidential
elections to around 16 per cent before the country defaulted.
In Egypt, where
protesters forced President Hosni Mubarak from power in February, yields
on its $1 billion Eurobond due in 2020 increased to about 7.8 per cent
in late February, from less than 6 per cent in December, doubling
spreads against U.S. treasuries.
Nigeria’s domestic
bond yields are expected to continue to rise, driven largely by
projections of accelerating inflation and rising government spending.
The naira has been depreciating against the dollar, easing to its
weakest in 18 months ten days ago, as businesses and wealthy Nigerians
take long dollar positions amid the uncertainty.
It traded at 155.70
to the dollar at the interbank on Monday compared to Friday’s close of
155.45, as strong demand for the dollar continued unabated.
Strong fundamentals
Overall though,
Nigeria’s fundamentals look strong. With oil prices well above $100 a
barrel and foreign exchange reserves building up back again, analysts
say this should provide some succour against the short-term political
uncertainty.
“Nigeria should be
in a relatively advantageous position in this current environment,” said
Razia Khan, head of Africa research at Standard Chartered Bank.
It could also help
boost the stock market, which rose 12 per cent in the first two weeks of
the year but has since seen year-to-date gains eroded to less than one
per cent, with foreign investors among those to have pulled out money.
If all goes well,
the swearing-in of the new president at the end of May should clear the
political uncertainty and allow investors to refocus on fundamentals,
the optimists say.
“I think there will
be a rally in June after the swearing-in of the new administration and
the first quarter results of the banks come out,” said Bismarck Rewane,
chief executive of Lagos-based consultancy, Financial Derivatives.
“The results will
show that the prices of bank stocks are really basement prices and will
induce many institutional investors to start buying after a long time on
the sidelines,” Mr. Rewane added.
REUTERS
