Nigeria’s successful Eurobond issue

 Nigeria has just raised $1 billion through an international bond sale. The country issued $500m of five-year bonds and $500m of 10-year bonds, at a yield of 5.375 percent and 6.625 percent, respectively, below the initial guidance by bankers. The overall order book was just over $4 billion, despite higher borrowing costs in the wake of market turmoil caused by the US Federal Reserve’s plans to end quantitative easing.

Cheap money, part of the Fed’s $85 billion monthly splurge on US assets, has in recent years found its way into emerging market domestic debt and equity markets on the back of attractive international rate differential (the difference between rates in Nigeria and the global market). To date, an estimated 10 percent of foreign portfolio investments in Nigeria are in FGN bonds.

However, the high cost of financing the domestic debt – with 10-year Nigerian bond yields at north of 13 percent – caused Finance Minister Ngozi Okonjo-Iweala to change strategy, and embrace the cheaper dollar-denominated debt. The proceeds from the bond sale are to be used to finance power transmission projects, according to the Finance Ministry.

We commend the FG for taking this bold step to plug our infrastructure deficit but caution that all effort should be made to utilise the debt for the purpose for which it was raised. Uncompleted transmission projects, according to the Roadmap for Power Sector Reform, amount to $750 million. Because the transmission network is the weakest link in the supply of electricity, completion of overdue and new projects, e.g., a new super transmission grid, is critical.

The completed NIPP projects could increase the country’s generating capacity by 5,000MW in three years, widening the gap between generation capacity and the capacity of the grid. The entire electricity value chain needs $10 billion to produce a “modest target” of 40,000MW in 10 years. A transmission grid that cannot transmit generated capacity will hinder the privatisation of the electricity industry.

Renaissance Capital, an investment bank, in its report “Nigeria Unveiled”, estimates that electricity supplied to Lagos State comes to 163 watts per resident. Though this figure is four times more than the national average, South Africans are supplied 25 times electricity. The northeast of Nigeria, especially Borno State, is in perpetual darkness: electricity supplied is a puny 7 watts. To power a 60 watt bulb, each resident of Borno State will need 9 times what they are being supplied.

The lack of power is putting a break on Nigeria’s industrial growth leading to a huge output gap, which is the difference between potential and actual GDP growth. Katsina State, Nigeria’s cotton hub, employs 12 percent of Nigeria’s manufacturing workforce but is unable to expand cotton production for exports due to lack of cheap energy for competitive advantage against Chinese imports.

The generation, transmission and distribution of stable electricity is critical for lifting millions of Nigerians out of poverty, and it hoped that the $1 billion Eurobond issued by the Federal Government will help facilitate a step in that direction, by investing proceeds in power infrastructure devoid of politics and ineptitude.