Last week the potential threat posed to Nigeria’s public sector finances from a little-known law case, launched by a little-known natural gas company called Process and Industrial Developments, became apparent after it was a revealed that a London-based hedge fund manager has purchased a stake in the claim. See page 2.
Last week, the NIFEX rate remained stable at NGN358.79/US$1. The NAFEX rate appreciated by 0.09% to NGN360.15/US$1. The US dollar in the NAFEX (inter-bank) market trades at a 0.38% premium to the NIFEX rate.
This month the Central Bank of Nigeria (CBN) has injected US$357.9m into the NAFEX market which is low compared with the trend late last year. The CBN’s FX reserves currently stand at US$42.9bn. We reiterate our view in Coronation Research: Year Ahead 2019, A tale of two halves, 15 January, that FX reserves are sufficient to ensure Naira exchange rate stability in 2019.
Bonds & T-bills
The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 7bps to 14.24%, and at 3 years rose by 6bps to 14.61%. The yield on a 364-day T-bill fell by 69bps to 14.34%. The yield on a T-bill with 3 months to maturity decreased by 58bps to 11.84%.
Last week Friday, the National Bureau of Statistics (NBS) released the inflation print for February with the rate dropping by 6bps m/m to 11.31% y/y. The fact that inflation more-or less held steady in February contrasted with earlier fears that election spending would force it up.
The price of Brent rose by 2.16% last week to US$67.16/bbl. The average price, year-to-date, is US$63.09/bbl, 11.99% lower than the average of US$71.69/bbl in 2018, but 15.23% higher than the US$54.75/bbl average seen in 2017.
According to Reuters, the Organisation of the Petroleum Exporting Countries (OPEC) is set to scrap its planned meeting in April and decide on whether to prolong oil supply cuts through to June, when the market would be able to evaluate the full impact of U.S sanctions on Iran and Venezuela.
The Nigerian Stock Exchange (NSE) All-Share Index recorded a loss of 2.45% last week, taking the year-to-date return to negative 0.92%. Last week Cadbury Nigeria (+9.09%), Sterling Bank (+6.38%) and Diamond Bank (+2.89%) closed positive while Zenith Bank (-11.02%) and International Breweries (-10.93%) fell. Last Monday Zenith Bank shares became ineligible for a N2.50 final dividend so the adjusted week-on-week decline was just 2.00%.
The equity market rallied 4.06% between the beginning of the year and February’s elections and has fallen 4.86% since. We maintain that there is value among selected stocks, particularly bank stocks.
P&ID’s risk to Nigeria
The ongoing court case between Nigeria and an oil and gas firm, Process and Industrial Developments (P&ID), dates back to 2010. P&ID is reported to have entered into a contract with the Ministry of Petroleum Resources of the Federal Government of Nigeria (FGN) in 2010 and, according to reports, the agreement obliged P&ID to build a natural gas processing plant while the FGN would build pipelines to bring untreated gas to the plant (gas which is otherwise flared in the course of oil production). P&ID alleges that: it invested US$40m in the project (though it did not actually build a plant); the FGN did not build the pipelines specified in the agreement; it (P&ID) is entitled to compensation for lost earnings as a result; the governing law is English.
The original arbitration in an English court in favour of P&ID was upheld in 2017 with a final award of just under US$6.6bn (Naira 2.4 trillion at today’s exchange rate), though with interest accruing so that the award is currently referred to as close to US$9.0bn (N3.2tn). The English court award is being applied in the US courts. Lawyers for the FGN have argued that the FGN is protected under the Foreign Sovereign Immunity Act (FSIA) and the FGN has been given leave to appeal to the US Court of Appeals for the District of Columbia Circuit.
It is not clear to us, at this stage, how the FGN’s appeal citing the FSIA has progressed. However, it was about the time of the FGN’s decision to use this defense that VR Capital Group was reported to have involved itself in the case by buying, according to Bloomberg (Friday, 8 March), a 25% stake in P&ID. The fact that VR Capital Group, a hedge fund specialising in distressed sovereign debt, has taken a stake in the claim underlines its seriousness, in our view.
The FGN has several options open to it, in our view: it could either negotiate or borrow from the international market to pay the alleged liability. A potential award of this size could have serious implications for Nigeria’s fiscal position, borrowing costs and even its foreign exchange position, in our view, and represents a significant new risk. For comparison, the FGN’s 2019 budget (as currently proposed) is N8.8tn (US$24.4bn) and the foreign exchange reserves of the Central Bank of Nigeria (CBN) are US$42.9bn.
If successful – and we emphasise that the FGN has appealed – then the FGN could be on the hook for a lot of money. The question, therefore, is to what extent a government feeling the pinch would be able to turn to the private sector for help. See Coronation Research: P&ID’s risk to Nigeria: Hedge fund purchase underscores fiscal, monetary risk, 14 March.
This report was contributed by Coronation Merchant Bank.