Eurobonds, bonds

Capital inflow may still be restricted – CardinalStone Research

By Emeka Anaeto, Business Editor

The Federal Government recorded a resounding success in the Eurobond issuance programme executed last week.

In this review, analysts at CardinalStone, a Lagos based investment house, presents an overview of the implications of the issuance.

They stated: ‘‘Nigeria successfully accessed the international capital market on Tuesday, issuing $4.0 billion in Eurobonds. The issuance was spread across three tenors; $1.25 billion on the 7-year, $1.5 billion on the 12-year and $1.25 billion on the 30-year instrument, with respective yields at 6.125%, 7.7375% and 8.250%.

Total subscription was $12.2 billion, implying a bid to cover of 4.1x. This was unsurprising to us, given the cumulative effect of high global stock of negative-yielding debt, elevated global liquidity, and Nigeria’s moderate-to-low risk of debt distress.

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Since the start of the year, the foreign exchange (FX) liquidity crunch has intensified due to: 1) low intervention by the CBN and; 2) weak portfolio inflows.

To the first point, CBN’s current monthly intervention in the FX market is likely below $1.8 billion, which is 1.7x lower than the average for first quarter 2020, Q1’20 (pre-pandemic level). This mainly reflects the impact of OPEC+’s cap on crude oil production and persistent challenges at various oil terminals, which has largely masked pass-through from higher oil prices. The second point is corroborated by the plunge in capital importation to a 22-quarter low of $876 million in Q2’21 (vs $1.2 billion in Q2’20). These factors may have driven down average turnover in the Investors and Exporters (I&E) Window to $108.7 million in 2021 from $345.0 million in Q1’20.

Despite the Eurobond issuance, the CBN’s body language suggests that it is unlikely to ramp up intervention sales to pre-pandemic levels in the near term. Our view is premised on the ongoing FX rationing (with the suspension of Bureau de Changes (BDCs) sales in July), existing Foreign Portfolio Investors (FPI) backlogs, and the unrepatriated dividend of foreign equity holders.

In any case, the Eurobond liquidity is equivalent to just 1.7 months of intervention sales, assuming CBN’s pre-pandemic monthly FX supply of $2.3 billion, all else being equal.

In our view, while inflow from Eurobond is essential, it may not be enough to drive a material resurgence of capital inflows to the country in isolation.

We believe that foreign investors may need better convincing before making big bets. Thus, the issue of outstanding dollar demand backlogs would need to be addressed, and the overall FX liquidity framework will need to be improved to enhance investors’ confidence.

In addition, foreign investors may require an improved carry trade that better reflects the Nigeria risk environment, especially given the forthcoming pre-election uncertainties of 2022.

The point on possible pre-election year risk is supported by the average capital importation contraction of 27% in two of the last three pre-election years.


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