Investors fear Nigeria inflation to get worse; opt for long-term bonds

Investors have eagerly embraced Nigeria’s longest-dated debt plan, offering to lend more than the government sought, signalling their confidence in the 18% return despite the country’s rampant inflation.

The reopening of the 2053-dated debt, which will be redeemed in 30 years, was oversubscribed by more than three times on Monday, with a total subscription of N330 billion ($364 million), compared with the N90 billion put on offer by the Debt Management Office, Bloomberg reported.

On the contrary, shorter bond plans, including the 2029, 2033 and 2038 maturities, were all undersubscribed at the same auction.

The preference for the 30-year debt “signals that investors are very concerned about inflation in the near term,” Bloomberg quoted Fola Fagbule, deputy director and head advisory at Africa Finance Corporation, as saying. “The longer-term inflation outlook is more likely to be favourable than the near term.”

Nigerian inflation rose to a new 18-year high in October. Consumer prices rose 27.3% from the prior year, compared with 26.7% in September, according to data published on Wednesday by the National Bureau of Statistics.

Borrowing for the budget

The debts are part of the government’s borrowing to finance its budget deficit.

Patience Oniha, director-general of the debt office, said last week that the DMO has raised N5.8 trillion, representing 82% of the targeted borrowing this year from the domestic capital markets.

There’s about 1.28 trillion naira of planned borrowing this year that hasn’t yet be raised.

This excludes the extra 2.17 trillion naira that may be needed to fund the supplementary budget, which was signed into law last week.

Not in the short term

Analysts say the demand for the 30-year bond showed investors believe it will deliver a handsome return over inflation in the long run.

“Pension funds exist to meet long-term liabilities, so if you have a long-term asset yielding 18% which is 500-600 basis points over long-term inflation, you load up,” Wale Okunrinboye, chief investment officer at Access Pensions Ltd., said told Bloomberg.

Samir Gadio, head of Africa strategy at Standard Chartered Plc, said an assumption that inflationary problem will normalize in the medium-term, not short-term, increased the demand for the longer-term paper.

With inflation at over 27%, any yield below that value returns a negative interest to investors.

Investors have urged the central bank to raise interest rates for they move closer to positive yield.

Analysts also warn that Nigeria’s negative real yields deter foreign investors, even as the government seeks to attract capital by easing exchange controls alongside other reforms of the economy.