Nigeria’s Eurobonds up after Emefiele’s removal. Here’s what it means

Nigeria’s dollar bonds rose on Monday after Friday’s suspension of Central Bank of Nigeria governor, Godwin Emefiele.

The 10-year dollar-denominated bonds or Eurobonds surged 2.6 cents before falling slightly.

The debt maturing in 2051 saw the biggest gain, rising 2.327 cents to 72.526 cents a unit at 0829 GMT, according to Tradeweb data cited by Reuters.

The premium investors demand to hold Nigerian debt over US debt fell 46 basis points to 710, the biggest drop this year, Bloomberg also reported citing JPMorgan index.

Mr Emefiele who was suspended by President Bola Tinubu after the markets closed on Friday. The State Security Service said on Saturday he was detained for unexplained “investigative reasons.” Folashodun Shonubi, a deputy governor in charge of operations at the bank, took over in an acting capacity.

– Why this matters

The performance of the bonds is a sign that international investors welcomed the removal of Mr Emefiele whose monetary policies, including the use of multiple exchange rates, were well criticized.

Nigeria faces severe dollar shortages and for foreign investors, a multiple-exchange rate policy means it could be difficult to get invested dollars back, a problem for foreign direct investment.

The International Monetary Fund has cited central bank interventions in Nigeria’s foreign-exchange market as a hindrance to capital inflows. Nigeria’s FDI fell 52% to $698 million in the six years through 2021.

Mr Emefiele’s central bank also handed the government of former President Muhammadu Buhari N22.7 trillion naira ($49 billion), helping to push public debt to a record N77 trillion. Lenders are also wary of governments that are heavily indebted.

President Tinubu has said his government will unify the exchange rates to allow naira trade freely. Wale Edun, speculated to be named CBN governor under the new government, told Bloomberg Monday that the unification will happen soon, likely within the next quarter.

– What analysts think

“This could spell the end of unorthodox and often conflicting and confusing monetary policies that held back economic growth and destroyed local and foreign investor confidence,” Ayodeji Dawodu, head of Africa sovereign and corporate credit research at BancTrust & Co. in London, told Bloomberg.

Barclays economist Michael Kafe said in a note to clients on Monday that, “We believe the changes signal a new era of focused, predictable monetary policy and a shift towards non-interventionism in the foreign-exchange regime.”

“The markets will respond positively to an administration it believes to be more market oriented,” Yemi Kale, chief economist for Nigeria at KPMG and former statistician general, said.

– Bonds? What it all means Nigerians?

When a country’s dollar bonds go up, it means the value of those bonds has increased. But what does that really mean for Nigeria and Nigerians and why is it important? Let’s start with what a bond is.

A bond is a type of investment where an investor lends money to a government or a company in exchange for periodic interest payments and the return of the initial investment at a later date. It’s simply giving a loan to someone and receiving interest in return.

Now, imagine you’re an investor, and you decide to buy a bond issued by a country, let’s call it “Country X.” The value of the bond represents how the market sees the debtor’s ability to pay back the borrowed money, that is the debtor’s creditworthiness. When the value of Country X’s dollar bonds goes up, it means more investors are willing to buy those bonds, driving up demand.

There are a few reasons why this is significant.

First, when the value of a country’s bonds increases, it indicates that investors have more confidence in that country’s economy and financial stability. It suggests that the country is seen as a safe place to invest money, and this can have positive effects on the overall economy.

In the current context of unified exchange rate, foreign investors are also more confident they will be able get their dollars back – not through the black market where it is more expensive.

Another reason this is key is that when a country’s bonds are in high demand, it means that the government can borrow money at lower interest rates. This is because investors are willing to accept lower yields on their investments, knowing that they are investing in a stable and reliable country.

Lower interest rates on government borrowing can free resources for developmental projects. It can also have a ripple effect on the economy, as it reduces the cost of borrowing for businesses and individuals. This can stimulate economic growth and encourage investment and spending.

Additionally, when a country’s dollar bonds go up, it can attract foreign investors. Foreign investors are more likely to invest in a country when they see its bonds performing well.

This can bring in much-needed foreign currency, which can be used to fund infrastructure projects, education, healthcare, and other areas of development. It can also boost the country’s reputation and attract further investment.

– Not foolproof

However, bond prices can be influenced by various factors, such as changes in interest rates, inflation, and geopolitical events. So, while an increase in bond prices is generally seen as a positive sign, it’s not a foolproof indicator of a country’s overall economic health.