Africa’s most populous country is in the midst of a fiscal crisis, which is driven by soaring debt service payments. These payments will soon cost more than the government generates in revenue. The three main candidates vying to replace outgoing President Muhammadu Buhari at the upcoming elections on Saturday, February 25, 2023, have promised to right the ship, but bond performance suggests investors are not buying it. Nigeria’s bond market is already betting that the nation’s next leader, whoever it is, won’t be able to repair the shambles left by the previous administration.
Nigeria’s dollar bonds have declined 6.8 percent over the past month, exceeding the average drop of 1.9 percent in a Bloomberg index of emerging-market peers. The extra-yield investors demand to hold Nigerian dollar debt rather than US Treasuries has risen by about 136 basis points to 817. That is less than 200 basis points from levels traders considered “distressed.” “Nigeria’s current economic troubles are the culmination of a multiyear slide that began under previous administrations and accelerated under President Buhari,” Patrick Curran, a senior economist at Tellimer Ltd., said. Tellimer is a firm that specializes in emerging-market research. “The key difference is that with debt service absorbing over 100% of federally-retained revenue, there is a far shorter runway to turn things around,” he added.
Total debt stock exploded more than 6x towards end of Buhari’s tenure.
Under the present administration, Nigeria’s total debt stock exploded more than six-fold to about 77 trillion naira ($167 billion), or 40 percent of GDP. Much of that came in one fail swoop at the very end of his tenure when he tucked an extra $50 billion onto the state debt pile. Thus, he is leaving future administrations to pay for the overdrafts that his government took from the central bank over its eight years in power.
Concerns over economic stability have put the naira under pressure, and it fell to a record low of 461.78 against the dollar last week in the official market. There, the rate is tightly controlled. But it fell to 755 against the dollar on the widely-used black market. The cost to insure Nigeria’s debt against defaults using credit default swaps has also jumped from 644 basis points at the beginning of the month to 728. Interest in companies has remained in one bright spot, with the NGX All Share Index trading near its highest levels since 2008, although it’s still below last year’s levels in dollar terms.
Criminals are stealing up to a fifth of the country’s output daily.
The World Bank has said that the next president should quickly implement reforms that Buhari neglected to enact. They include: quashing a multiple exchange-rate regime that is repelling investors, removing import restrictions, and lifting fuel subsidies that cost most of what it makes pumping crude. Nigeria’s oil sector, which accounts for most of its export earnings, has suffered under Buhari. Production fell to a multidecade low in 2022 (at about 1 million barrels a day, roughly half what it was in early 2020) with criminal syndicates in the Niger Delta stealing up to a fifth of the country’s output every day. Daily production has since rebounded to 1.6 million barrels.
Three leading presidential candidates — Bola Ahmed Tinubu, leader of the ruling All Progressives Congress (APC); former Vice President Atiku Abubakar of the Peoples Democratic Party (PDP); and ex-governor of Anambra State, Peter Obi of the Labour Party — have each made similar, largely market-friendly pledges to fix the economy, including cutting the fuel subsidy. Peter Obi, who took the political space by surprise, has promised to reprofile the nation’s debt if elected by extending maturities. Patrick Curran said that Obi’s victory would be the best outcome for investors given his market-friendly orientation, while a Tinubu win would be the worst because of his more interventionist approach and greater likelihood of continuity with some of Buhari’s failed economic policies.
Social and institutional constraints will make whoever wins struggle.
Moody’s Investor Service cautioned that whoever wins will struggle to carry out urgent fiscal reforms because of “social and institutional constraints,” according to a Bloomberg report last month announcing its downgrade of Nigeria’s long-term foreign-debt rating to Caa1 from B3. That puts Nigeria on par with Pakistan, which has been pleading for debt relief from rich nations since catastrophic floods last year. An election with no clear leader and a subsequent run-off would likely further delay any reforms, Neville Mandimika, emerging-market sovereign strategist at Morgan Stanley & Co Intl Plc, said in a note to clients.
Related Link
World Bank: Website
