The value of Nigerian government dollar-denominated bonds experienced a substantial increase subsequent to the state-owned energy corporation securing a $3 billion loan. This loan infusion is expected to bolster the availability of foreign currency within the local foreign exchange market.
Thank you for reading this post, don't forget to subscribe!The sovereign’s dollar bonds maturing in 2047 registered a notable gain of 1.5 cents on Thursday, propelling them to 69.31 cents on the dollar. This marked the most significant daily upswing since July and led to a decrease in the yield to 11.36%. Additionally, Nigeria’s international bonds maturing in 2033 and 2051 also enjoyed gains.
The surge in bond performance materialized after a period of elevated yields earlier in the week, caused by the nation’s decision to cap gasoline prices. This move contributed to a decrease in the parallel-market exchange rate for the naira currency, pushing it to new lows due to a scarcity of the US dollar. On Wednesday, the state-owned energy company NNPC entered into a $3 billion agreement with Afreximbank, a transaction intended to enhance the nation’s dollar liquidity.
Samir Gadio, the head of Africa strategy at Standard Chartered Bank in London, stated, “News of the $3 billion loan, combined with an easing of the parallel market rate, likely played a role in the recovery of the bonds. Eurobond holders will be monitoring for further policy initiatives aimed at improving foreign exchange liquidity and establishing a strategy for gradually replenishing foreign exchange reserves.”
Adding to the favorable sentiment, Nigerian President Bola Tinubu appointed former investment banker Wale Edun as finance minister. Edun’s involvement has been pivotal in steering the nation away from the unconventional policies of suspended central bank governor Godwin Emefiele, resulting in market-friendly measures.
NNPC’s agreement encompasses an immediate disbursement of a portion of the funds to provide support to the Nigerian government’s ongoing fiscal and monetary reforms aimed at stabilizing the exchange rate market. The loan’s objective is to equip the government with the necessary dollar liquidity to stabilize the naira, minimizing associated risks.
However, while offering temporary relief, the loan fails to address the fundamental issues driving Nigeria’s shortage of US dollars. These underlying concerns include an excessively accommodative monetary policy and challenges related to oil supply due to theft and vandalism, as noted by Bismark Rewane, CEO of consultancy firm Financial Derivatives Co. in Lagos.
