Don’t look for bond bubble in Nigerian debt issue

November 3, 2010

Nigeria has a bad rap in the developed world. Renowned for email scams and widespread corruption, Nigeria runs the risk of being judged, perhaps unfairly, by investors looking warily at its $500 million bond offering scheduled for later this year or in early 2011. But Africa’s most populous nation, in a post-crisis world, actually looks deserving of the funds.

First, Nigeria has very little debt—it stands at just 16 percent of GDP. Compare that with the United States, where public debt stands at 88 percent of GDP, or worse, Greece, where the debt load has soared to 133 percent, according to JPMorgan. That also means a scarcity of Nigerian paper may appeal to investors wanting to diversify into frontier economies.

Second, it’s Africa’s largest producer of crude. With oil prices trading around $85 per barrel, Nigeria, which assumes a $60 per barrel price in its budget, should have little difficulty staying current on its debt payments. Ballpark estimates for the offering would put the yield at less than 6 percent, hardly crippling. Moreover, Nigeria’s non-oil economy looks relatively robust, with growth clocking in at 8.3 percent in 2009.

There’s no getting around corruption in Nigeria, however. According to Transparency International, the country scores 2.4 on a scale of 10, with 0 being highly corrupt. While bad, it’s actually better than Russia, which scored 2.1. Moreover, investors handed over $5.5 billion this year to that one-time defaulter, and consonant of the BRICs.

Political uncertainty surrounding presidential elections in January may give some investors pause. But there is a good chance the deal will not hit the market until after voters go to the polls, not least because of the difficulty of shopping a debut dollar-denominated bond during the holiday season.

That should give investors plenty of time to see that Nigeria’s debt offering, rather than suggesting markets have lost their marbles, shows that old assumptions and stereotypes are rightly being questioned.

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