Nigeria’s Sovereign-Risk Premium Hits Eight-Month High, Dollar Bonds Underperform Amid Protests

Nigeria’s sovereign-risk premium surged to an eight-month high, and its dollar bonds were some of the worst-performing emerging-market assets on Friday, amid concerns that cost-of-living protests across the country could derail the government’s economic reform plan.

On the other hand, the stock market recorded mixed performance as the Nigerian Exchange Limited (NGX) depreciated on Thursday, the first day of the protest and appreciated on the second day.

This week’s unrest comes soon after violent protests had forced another African nation, Kenya, to scrap crucial measures introduced to raise budget revenue.

Some investors may fear a similar outcome in Nigeria, where reforms introduced by President Bola Tinubu have inflicted pain on the population, according to Bloomberg.

Political noise and “a challenging context for reform,” are weighing on Nigerian bond prices, according to Citigroup Inc. strategists Alexander Rozhetskin and Luis Costa. 

“The sovereign bonds have been lagging over the last two months, particularly in the last weeks, as the noise around the cost-of-living protests is increasing,” they said in a note sent on August 1.

On Friday, the extra average yield investors demand to own Nigeria’s debt relative to Treasuries rose 23 basis points to 647 basis points, according to indicative data from JPMorgan Chase & Co. If the spread closes at this level, it would be the highest since November.

Nigerian Eurobonds underperformed a Bloomberg index of frontier and emerging-market sovereign dollar debt. The biggest laggard was the 2051 bond, the price on which slid to 75.4 cents on the dollar as of 12:36 p.m. in London — down 1.4 cents on the day and the lowest in over a month.

Reforms introduced by Tinubu included the scrapping of costly fuel subsidies, and allowing the naira currency to trade more freely in a bid to attract foreign capital inflows.

However, the protesters are campaigning against the policy changes which have driven inflation to a near three-decade high in a country where 40 per cent of the population lives in extreme poverty. Organisers of the demonstrations have called for 10 days of protests through August 10.

However, the Citi strategists do not expect the Nigerian protests to reach the scale of the recent unrest in Kenya, where the government was forced to abandon measures seen as crucial for increasing budget revenues. For that reason, they maintain their “middleweight” rating on Nigerian bonds, adding “the curve may start to look attractive on a relative value basis.”

Meanwhile, on the NGX, on the first day of the protest, the stock market depreciated by N236 billion in market capitalisation to close at N55.278 trillion as the Nigerian Exchange Limited All-Share Index (NGX ASI) lost 414.46 basis points or 0.42 per cent to close at 97,359.76 basis points.

There was a twist on Friday, as the market capitalisation appreciated by N219.14 billion to close at N55.497 trillion from N 55.278 trillion the stock market opened for trading.

Consequently, the NGX ASI gained 385.97 basis points or 0.4 per cent to close at 97,745.73 basis points from 97,359.76 basis points it closed the previous day.

However, in its Week-on-Week (WoW) trading activities the overall market capitalisation was down by N108 billion as the NGX ASI depreciated by 455.76basis points or 0.46per cent as investors trade the stock market with caution.

According to analysts at Cordros research, “While we expect the ongoing H1 2024 earnings season to ultimately guide the market’s direction over the short term, we still expect bearish sentiments to remain the key theme as investors remain cautious and continue to exhibit weak appetite for Nigerian tickets.”

Kayode Tokede 

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