Nigerian Finance Minister Kemi Adeosun plans to travel to China next week,
aiming to negotiate a loan of up to $2 billion to help fund record budget
spending, financial and government sources said on Wednesday.
They also said Nigeria – which is suffering its worst economic crisis for
decades – has shelved plans to meet investors about returning to
commercial borrowing on the Eurobond market.
One Nigerian government official told Reuters that any loan agreed during
Adeosun’s trip could be signed by President Muhammadu Buhari in Beijing
next month.
“The finance minister, in the company of the central bank governor, is
scheduled to be in China sometime next week to conclude negotiations on
the $2 billion loan,” said the official, who asked not to be named.
With China largely closed for the Lunar New Holiday, it is unclear how
keen Beijing is on the idea, or how tough a bargain it might demand.
The official acknowledged negotiations had been underway for some time and
that the terms had yet to be agreed. However, he added: “Hopefully it may
be sorted out during this meeting and the loan will be signed during
President Buhari’s visit to China in March this year.”
The central bank could not confirm whether Governor Godwin Emefiel would
be joining Adeosun.
Nigeria wants to raise about $5 billion abroad to cover part of its 2016
budget deficit. This is projected to hit 3 trillion naira ($15 billion)
due to heavy infrastructure spending at a time when the slump in global
oil prices has slashed it export revenues.
Buhari, who was elected in March 2015 on a promise to fix the West African
country, wants to turn around the economy by investing in power plants and
transport, ending a development paralysis under his predecessor Goodluck
Jonathan.
The president asked China in December to fund rail and power projects and
Adeosun, who already visited Beijing last week, has raised the possibility
of seeking a loan from the Export-Import Bank of China.
NO ROAD SHOW
Nigeria had wanted to raise $1 billion from Eurobond investors but has
dropped plans to sound them out at a non-deal “road show” which the
finance ministry had tentatively planned for March, financial sources say.
“They will wait a bit with a road show as they wouldn’t be able to get a
good deal,” said one source familiar with the finance ministry plans.
With world markets in turmoil, investors are wary of lending to anything
but highly-rated rate emerging economies. Nigeria’s reluctance to devalue
the naira currency, which has plunged on the black market, would further
discourage investors, meaning the cost of commercial borrowing would be
prohibitive.
That puts pressure on Africa’s biggest economy and top oil producer to
borrow more from other sources such as China. Nigeria had up to now
planned to raise around $4 billion at concessionary interest rates from
sources such as the World Bank.
While the government official foresaw a $2 billion China loan, a financial
source put the amount at more than $1 billion. The finance ministry could
not be immediately reached for comment.
Adeosun has said Abuja has held “explanatory talks” with the World Bank.
It has also asked the African Development Bank for a $1 billion budget
support loan.
A World Bank loan would probably be tied to specific goals with strings
attached. As well as infrastructure projects, Nigeria also wants loans to
refinance existing debt, one financial source said – an idea that would be
hard to sell to the World Bank or other development-focused lenders.
The World Bank has confirmed talks have been held on “Development Policy
Operation” funding, which typically aims to improve infrastructure and
create jobs. The multilateral lender has been studying projects to fight
poverty in northern Nigeria, where the jihadist Boko Haram group is waging
an insurgency.
FREEING THE NAIRA
If talks with China or multilateral agencies fail, Nigeria would struggle
to find willing commercial lenders.
“It’s going to be difficult for issuers to come to market now unless they
are at the high end of the credit quality spectrum,” said Zsolt Papp,
client portfolio manager at JPMorgan Asset Management.
Reflecting the higher risks as Nigeria struggles with sharply reduced oil
revenue, the average yield spread on its sovereign dollar bonds – the
premium investors demand to hold them over U.S. Treasuries – has climbed
to 713 basis points.
That is a rise of 100 basis points since the start of last month and more
than double levels a year ago, according to the EMBI Global emerging debt
index. Nigeria’s 2023 bond issued in 2013 with a coupon of 6.37 percent is
now yielding almost 9 percent.
To excite buyers, Nigeria would have to devalue or float the naira.
Investors believe its overvaluation is delaying economic recovery
especially as other oil exporters from Russia and Angola to Colombia have
devalued their currencies significantly in the past 12 to 18 months.
The Nigerian currency hit a new low this week on the black market where a
dollar fetched 318 naira, compared with the official rate of 197.
“The policy response in Nigeria has been very slow with respect to the
currency,” said Claudia Calich, head of emerging debt at M&G Investments
in London. “If you look at Angola they have allowed the currency to
devalue quite a bit so the rate of potential deterioration in Nigeria in
future might be higher.”
Reuters