As expected, Nigeria on Friday January 21st launched
its B+ 10-year $500mn Eurobond issue at 6.75% coupon rate.

The issue was successfully oversubscribed at 2.5 times however, due to growing worries about Nigeria’s fiscal management - especially as it relates to government management of the excess crude oil account - the yields on the Nigerian issue at 7% were higher than Ghana’s lower ‘B’ rated issue that is yielding only at 6.3% and Gabon’s 2017 Eurobond, rated one step higher by S&P, but yielding at 5.32%. Nigerian Finance Minister Olusegun Aganga, who is expected to step down in April after he likely wins a senate seat in his home state of Edo, will have to answer to increasing investor questions over the nation’s fiscal management.
Conversely, Ghana’s inflation rate continues to fall and with rising cocoa and gold prices, the Cedi is poised for a significant appreciation in 2011, making Ghana’s bonds even more attractive to foreign buyers.

Meanwhile, Nigeria’s growing budget deficit and worries over fiscal management means that the Nigerian central bank’s program of defending the Naira at around N152/$1 may also come under increased pressure as foreign exchange reserves dwindle. If currently elevated global oil prices take a downward turn on renewed European financial worries, growing Chinese inflation worries and monetary tightening or a 2011 US fiscal austerity budget, worries over Nigeria’s government revenues and fiscal management will only deepen and push its Eurobond yields higher. Ghana’s yields are conversely expected to trend lower as foreign investors demand the issue and the price of the bonds rises. Ghana’s sovereign debt ratings will likely see an upgrade this year. On the back of accelerated GDP growth and falling inflation, many African countries with outstanding Eurobond debt issues will see a ratings upgrade in 2011.

As a result, countries such as Kenya, Zambia and Nigeria, who are all hoping to tap the debt markets, will likely be able to do so later in 2011. Of the three, the Nigerian and Zambian issuances will be most problematic because they are indirectly tied to the direction of commodity prices - copper for Zambia and oil for Nigeria. Both commodities, despite their recent price rises, are likely to face strong headwinds in 2011 as the global financial system remains ensnared in a ‘liquidity trap’ with bank intermediation channels clogged with bad loans and toxic assets. Recent anti-inflationary measures by China will also impose a ceiling on global commodity prices in 2011.

In Egypt, Nigeria and Cape Verde, the expected ratings downgrades will be partly based on tensions surrounding their respective national elections and the resulting political instability. In Ghana, Uganda and South Africa, the likely ratings upgrades will reflect improving government revenues and stronger than expected macroeconomic fundamentals. Ghana’s new oil revenues will bolster government coffers. In Ghana the passage of a much expected Oil Revenue Law will likely trigger an S&P ratings upgrade. In Senegal, growing fear of inflation and the lack of political clarity over who will succeed President Abdoulaye Wade will likely trigger a ratings downgrade sometime in 2011.