Following Moody’s downgrade of Nigeria’s sovereign bond during the weekend, the country’s long-term debt instrument was dumped at its fastest pace in three months on Monday.
According to Bloomberg, the extra yield investors demand to hold Nigeria’s dollar debt instead of treasuries widened 49 basis points to 780.
The rate on Nigeria’s 2032 bonds jumped 56 basis points to 12%, also the most since October. Forward contracts on the currency traded 28% weaker than the official rate on the one-year tenor.
Threat to Nigeria’s credit: The latest moves threaten to send Nigeria’s credit spreads down to distressed territory, widely described as 1,000 basis points above Treasury yields — as the country battles slow growth, fiscal strain and a dollar squeeze.
While elections on February 25 may provide a catalyst for economic reforms, implementation could take time amid social constraints, Moody’s said over the weekend while lowering the country’s long-term foreign-debt rating to Caa1 from B3.
Kaan Nazli, a senior economist and money manager at Neuberger Berman Asset Management said:
- “Nigeria faces significant structural challenges and we do not take it as a given that the mild improvements following the elections will be sufficient to counter them. There would also be the concern of a spillover into the broader region given it is one of the largest sub-Saharan economies alongside South Africa.
- “The nation isn’t a debt-default candidate in the near term, but that risk could increase the next year if fiscal consolidation doesn’t occur.”
The sovereign spread had traded above 1,000 basis points until early November, when expectations for China’s reopening boosted Nigeria’s bonds, pulling them out of the distressed territory.
Nigeria’s debt burden: The country’s repayment burdens are mounting even as the government comes under pressure to boost social spending to help families cope with the aftermath of Covid-19. Interest payments are expected to rise to half of the general government revenue over the medium term from about 35% in 2022, while debt as a proportion of gross domestic product will increase to 45% from 34%, according to Moody’s assessment.
It may be recalled that the Central Bank’s Monetary Policy Committee (MPC) increased its primary interest rate from 16.5 to 17.5.
It is noteworthy that bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.
In case you missed it: Moody’s downgraded the federal government’s long-term foreign-currency and local-currency issuer ratings and its foreign currency senior unsecured debt ratings to Caa1, from B3 and changed the outlook to stable. Moody’s also downgraded Nigeria’s foreign currency senior unsecured MTN program rating to (P) Caa1 from (P) B3.
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