Foreign Holdings of Nigerian Bonds Surge Nearly 5 Fold in a Year

Foreign investors’ holdings of Nigerian bonds swelled nearly fivefold to an estimated $5.4 billion in the year after the country’s inclusion in a benchmark JP Morgan local currency bond index, according to figures obtained by Reuters.
Africa’s second-biggest economy joined JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) on October 1 last year, becoming the second African country after South Africa to be included in the index, which has $220 billion in assets under management benchmarked against it.
At the end of September 2012, offshore investors held approximately $1.2 billion in Nigerian bonds, which jumped to around $5.4 billion as of September 30 this year, according to figures provided by a market source who asked not to be named.
Foreign holdings of Nigerian Treasury bills, already popular before the inclusion, increased during the same period to $6.2 billion from $3.9 billion.
Five Nigerian bonds are part of the GBI-EM, which does not include Treasury bills, up from three initially.
Africa’s top crude oil producer now has a weighting of just under 2 percent in the index. It also joined the Barclays Emerging Market Bond Index in April this year.
The inclusion of Nigeria in global bond indices has raised the visibility of one of the continent’s most developed debt markets among offshore investors. Increased foreign inflows have helped stabilise the naira while enabling the country to diversify its investor base and reduce its borrowing costs.
But growing foreign participation could also heighten Nigeria’s vulnerability to changes in international investor sentiment, especially once the U.S. Federal Reserve begins tapering its quantitative easing programme.
While foreign inflows into the equities market have traditionally exceeded fixed income inflows, the data indicates that the latter now dominate.
Foreign bond and T-bill holdings, at $11.6 billion, now represent around a quarter of Nigeria’s debt stock, more than double the proportion in September 2012. Nonresident equity holdings stood at $10.3 billion as of September 2013.
In South Africa, nonresident holdings of government bonds reached 38 percent of its debt stock this year, a threefold increase since 2007.
Analysts at FBN Capital quoted Nigeria’s Debt Management Office (DMO) last week as saying foreign holdings of government debt, including T-bills, had reached $5.1 billion at the end of 2012, compared with $500 million at the start of that year.
Senior officials at the DMO did not respond to requests for comment on what the latest figures were.
JP Morgan said its prediction that Nigeria’s inclusion in the GBI-EM index would attract at least $1.5 billion into its bond market will have been easily surpassed.
“With $220 billion benchmarked to the GBI-EM and a Nigeria weight of 2 percent, we estimate about $4 billion in benchmarked investor money in Nigerian bonds at the moment,” said Giulia Pellegrini, JP Morgan strategist for sub-Saharan Africa.
Investors have been attracted to Nigeria’s bond market due to the country’s improving macroeconomic fundamentals and high yields relative to other GBI-EM members, said Pellegrini.
The average weighted yield on Nigerian bonds was 12.74 percent as of October 31, according to JP Morgan, while those of index peers Mexico and South Africa were 6.01 percent and 7.9 percent respectively.
But Nigeria was also touched by the market volatility after the Fed indicated in May it would begin scaling back its bond buying stimulus.
Foreign bond and Treasury bill holdings fell to $11.8 billion in June from a peak of $13.7 billion the previous month, the data indicates, though they have since risen.
Fears of increased spending ahead of presidential elections in 2015 and the likely departure next year of central bank governor Lamido Sanusi at the end of his term may moderate demand for Nigerian debt in the coming months, Pellegrini said.
“Looking into 2014, international investors’ appetite for Nigerian local bonds may further moderate on the expectation of Fed QE-tapering and, domestically, a possibly looser fiscal stance, the expected change in leadership at the central bank and the 2015 elections coming closer,” she said. (Additional reporting by Chijioke Ohuocha in Lagos and Vuyani Ndaba in Johannesburg; Editing by Pascal Fletcher, Ron Askew)

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