The allure of foreign bonds

  Last year Nigeria exported more goods than it imported. In the fourth quarter of 2012, the value of exports was 86 percent of Nigeria’s external merchandise trade. This surplus was the result of a decline in the value of imports from N9.8 trillion in 2011 to N5.6 trillion in 2012.

Exports increased by 15.5 percent, from N19.4 trillion in 2011 to N22.4 trillion in 2012. Most of the goods imported were machinery and transport equipment (23.5 percent), manufactured goods (12.4 percent), and commodities (34 percent). Commodities like beverages and tobacco, crude inedible materials, mineral fuel and oils, fats and waxes contributed to the noticeable fall in imports.

In terms of geography, most of Nigeria’s imports came from Asian countries which accounted for 41.2 percent of total imports. The share of imports from Europe and America were 26.5 percent and 25.3 percent, respectively. This geographic shift in trade reflects growing trade with China. China-Africa trade increased by 19.8 percent to $198.5 billion in 2012. Standard Chartered Bank expects the China-Africa trade volume to hit $325 billion by 2015. Most of this trade will be spurred by demand for machinery and equipment for infrastructure, oil and gas exploration and manufactured goods for consumption.

Rising trade volumes will likely lead to an increase in the use of the Yuan, the Chinese currency – $1 billion of transactions between China and Africa was in Yuan. This is small. Standard Chartered has forecast that China-Africa trade settled in Yuan will climb to $38.5 billion in 2015.

Still, China’s currency is growing in popularity among global currencies. Nigeria, a top importer of Chinese goods, shipped $9.2 billion worth of goods from China in 2012; 20 percent of these imports were settled in Yuan. South Africa settled 45 percent of its $15.3 billion import from China in Yuan. Standard Chartered contends Yuan-denominated bonds can provide countries like Nigeria access to new investors and expand borrowing options at a lower cost. This year, the Federal Government of Nigeria has planned a $1 billion dollar-denominated Eurobond and a $500 million Diaspora bond.

The advantages of “dim sum” bonds, i.e., Yuan-denominated bonds or Eurobonds, make economic sense. Investors hunting for better returns prefer bonds issued by emerging economies because their yields are higher. Nigeria’s oil wealth, despite slow structural reforms, and a highly import-dependent economy mean investors have to be rewarded for their risk. Government, not businesses, can pay such rates. However, government has found the cost of servicing naira-denominated bonds unbearable.

Low interest rates in western economies are not boosting their economies as intended. Nigerian banks, e.g., Diamond Bank, Fidelity Bank, are tapping into this slosh of cheap capital to fund companies like Etisalat that wants to raise $500 million from local banks. Projects are pining for investment. In the short to medium term these projects can’t wait until a local corporate and infrastructure debt market is developed. In the long term a vibrant local debt market could help avoid a “hard currency bond bubble”. Until then, the allure of Eurobonds or the prospect of a dim sum bond remains attractive.