LAGOS (Reuters) - Smooth elections in Nigeria could differentiate it from other political hotspots in the region and trigger renewed frontier investor interest in its Eurobond and equities.
Appetite for Nigeria’s $500 million debut Eurobond has been lacklustre since it launched two months ago, while a rally in the stock market in the first few weeks of the year has petered out, partly due to nervousness ahead of the April elections.
Turmoil in North Africa and the Middle East, as well as a brewing conflict closer to home in Ivory Coast, has heightened awareness of political risk and dampened appetite for emerging markets in recent weeks. Nigeria has been no exception.
Its 10-year Eurobond, issued on January 28 at a 7 percent yield, has traded broadly flat at 6.9 percent despite being 2.5 times oversubscribed at launch and Nigeria’s ability to service the debt, surprising some analysts.
April’s presidential, parliamentary and state governorship elections are set to be fiercely contested.
Incumbent President Goodluck Jonathan is considered the front-runner but faces tough competition in the mostly-Muslim north from former military ruler Muhammadu Buhari, whose supporters are hoping they can force a run-off.
The ruling People’s Democratic Party (PDP), which has dominated Nigerian politics since the end of military rule 12 years ago, is expected to see its strong parliamentary majority weaken and to lose control of some of the country’s states.
“The Eurobond is likely to be more sensitive to perceptions of stability ... We expect trading to be fairly cautious in the run up to elections, with potential further upside if things go smoothly,” said Business Monitor International’s Alan Cameron, sub-Saharan African analyst.
If Jonathan does not win a clear mandate from the first round on April 2 and elections go into a run-off, analysts say spreads could widen relative to risk-free U.S. treasuries.
“In the unlikely event that it comes down to a run-off, the country’s credit spread will probably widen since such a possibility has not been seriously priced into the bond,” said Samir Gadio, emerging market strategist at Standard Bank.
Ivory Coast’s disputed election led the country to a default on its $2.3 billion Eurobond, now trading at 36 percent to face value. Yields rose from under 10 percent ahead of Ivory Coast’s first round presidential elections to around 16 percent before the country defaulted.
In Egypt, where protesters forced President Hosni Mubarak from power in February, yields on its $1 billion Eurobond due in 2020 increased to about 7.8 percent in late February, from less than 6 percent in December, doubling spreads against U.S. treasuries.
Nigeria’s domestic bond yields are expected to continue to rise, driven largely by projections of accelerating inflation and rising government spending.
The naira has been depreciating against the dollar, easing to its weakest in 18 months ten days ago as businesses and wealthy Nigerians take long dollar positions amid the uncertainty.
It traded at 155.70 to the dollar at the interbank on Monday compared to Friday’s close of 155.45 as strong demand for the dollar continued unabated.
Overall though, Nigeria’s fundamentals look strong. With oil prices well above $100 a barrel and foreign exchange reserves building up back again, analysts say this should provide some succour against the short-term political uncertainty.
“Nigeria should be in a relatively advantageous position in this current environment,” said Razia Khan, head of Africa research at Standard Chartered Bank.
It could also help boost the stock market, which rose 12 percent in the first two weeks of the year but has since seen year-to-date gains eroded to less than one percent, with foreign investors among those to have pulled out money.
If all goes well, the swearing in of the new president at the end of May should clear the political uncertainty and allow investors to refocus on fundamentals, the optimists say.
“I think there will be a rally in June after the swearing in of the new administration and the first quarter results of the banks come out,” said Bismarck Rewane, chief executive of Lagos-based consultancy Financial Derivatives.
“The results will show that the prices of bank stocks are really basement prices and will induce many institutional investors to start buying after a long time on the sidelines.”