Nigerian bonds: analysis

Africa mapPension funds seeking emerging market local currency bonds have one more issuer to choose from.

This week Nigerian government bonds entered the emerging market local currency universe with their inclusion in the JP Morgan Global Diversified Index, the most followed emerging market debt index.

This brings the constituents of the index up to 15.

Reuters quoted JP Morgan as saying that $1.5 billion (€1.2 billion) could flow into Nigerian bonds.

The 2012 Asset Allocation Survey published in May by Mercer, an investment consultancy, said 9.5% of European pension schemes and 8.4% of UK schemes were looking to increase their allocations to emerging market debt over the next 12 months.

The bonds reacted to the JP Morgan announcement by returning up to 17% in price terms for bonds maturing in 2022 over two weeks, according to South Africa-based asset manager Investec.

Yields dropped by 0.16 percentage points to 12.66%, Bloomberg reported.

Yields on Nigerian bonds are currently between 12% and 14%, which Investec said made Nigeria the highest yielding bond market in the index after Brazil at 8.54%.

In a world characterised by historically low returns, such yields, coupled with a highly managed currency, are very likely to attract growing investor attention, said the firm.

Nigeria has the second largest GDP on the continent and over the past five and ten years, the country’s average economic growth has been 7% and 8% respectively, making it one of the world’s ten fastest growing economies.

But there are challenges, noted Investec: The country still relies heavily on oil; vested interests in several key industries pose a challenge to reforms; the three-part nature of government makes implementing fiscal policies difficult; infrastructure is in dire need of investment; there is a high level of language and cultural diversity which, at times, has lead to violence.

 To be included in the JP Morgan index a country needs to attain a minimum classification as a lower-middle income country for two years by the World Bank, and then demonstrate sufficient liquidity in its bond markets.

©2012 funds europe