Nigeria’s eurobonds experienced a second consecutive day of poor performance in the emerging-market credit landscape on Wednesday.
This decline was prompted by the government’s announcement that it would halt increases in gasoline prices, despite the backdrop of rising crude oil prices.
Among Bloomberg’s EM Sovereign Total Return Index, eight Nigerian bonds were among the 20 worst performers globally as of 9:45 a.m. in London.
Bonds due in September 2033 dropped by 1.1 cents to 75.19 cents on the dollar, marking their lowest point since June.
These bonds have seen value losses for 10 out of the past 13 days.
Furthermore, a $1 billion tranche of notes set to mature in January 2031 witnessed a decline of 1.09 cents to 84.79 cents, marking a continued decrease from the previous day’s drop, which was the largest since March.
This bond has been on a four-day losing streak, its longest decline since April. Prices for bonds due in 2032, 2033, and 2051 also experienced declines of at least 1 cent in early morning trade on Wednesday.
Nigeria’s bonds had enjoyed a strong run in June following the election of President Bola Tinubu, whose early actions were well-received by investors, boosting confidence in the nation’s economic prospects.
These actions included the removal of the costly fuel subsidy, the replacement of the central bank governor, and an overhaul of the complex multi-rate exchange regime.
However, the recent situation paints a different picture.
Patrick Curran, a senior economist at Tellimer Ltd. in London, noted that after the initial rally based on Tinubu’s ambitious reform agenda, the challenges of the next phase of reforms have become apparent.
An overly loose monetary policy stance, continued monetization of the budget deficit, and the re-emergence of a large parallel-market premium have posed obstacles.
Despite the positive impact on Nigerian stocks and bonds, the sharp increase in the cost of living due to inflation sparked protests from labor unions.
President Tinubu responded by announcing the suspension of gasoline price hikes in an effort to curb the 24.1% inflation rate recorded in July.
Many analysts now speculate that Tinubu may not have fully considered the implications of his pursuit of a deregulated foreign exchange regime.
This move could potentially lead to repercussions that the market might penalize.
Rating agencies are likely to view Tinubu’s policy shifts unfavorably, and speculators may target the local currency further.
Amidst the backdrop of rising crude oil costs and the depreciation of the naira by about 40% against the dollar since mid-June, independent petroleum marketers have been advocating for further gasoline price increases.
The government’s decision to freeze gas prices is seen as a temporary measure for price stabilization, rather than a complete reversal of subsidy reforms.
However, should this freeze become a permanent reversal of fuel-subsidy reforms, it would be seen as a negative for credit, as Nigeria’s financial capacity to sustain the subsidy is limited.
