Nigeria's Bonds Are Being Sold Off at The Fastest Pace in 3 Months Following a Downgrade.

Nigeria's sovereign-risk premium rose sharply on Monday after Moody's Investors Service downgraded the country's credit rating. This is the biggest increase in the risk premium in three months.
‍

The yield on West African government bonds has increased sharply in recent months, reaching its highest level since October. According to JPMorgan Chase & Co. data, the yield on the nation's 2032 bonds has jumped 56 basis points to 12%. This increase in yield is reflected in the forward contracts on the currency, which are now trading 28% weaker than the official rate on the one-year tenor.
‍

The latest moves in Nigeria's economy threaten to send the country's credit spreads back to distressed territory, widely described as 1,000 basis points above Treasury yields. Nigeria is currently battling slow growth, fiscal strain and a dollar squeeze. While elections on Feb. 25 may provide a catalyst for economic reforms, implementation could take time amid social constraints, according to Moody's. Over the weekend, Moody's lowered the country's long-term foreign-debt rating to Caa1 from B3.
‍

"Nigeria faces significant structural challenges, and it is not certain that the mild improvements following the elections will be enough to counter them," said Kaan Nazli, a senior economist and money manager at Neuberger Berman Asset Management. "There is also a risk of spillover into the broader region, as Nigeria is one of the largest sub-Saharan economies alongside South Africa."
‍

According to Nazli, Nigeria is not at risk of defaulting on its debt in the near future. However, if fiscal consolidation does not take place, the risk of default could increase next year. Nigeria's bond prices have been volatile in recent months, but they have recovered somewhat since early November, when expectations for China's economic recovery boosted demand for Nigerian bonds.
‍

The country's repayment burdens are increasing even as the government faces pressure to increase social spending to help families deal with the aftermath of Covid. Interest payments are expected to increase to half of government revenue over the medium term, from about 35% in 2022. Meanwhile, debt as a proportion of gross domestic product is expected to rise to 45% from 34%, according to Moody's assessment.
‍

Nigeria's currency came under pressure on Monday, with non-deliverable forward contracts plunging to record lows versus the current official rate of 461.36 naira per dollar.
‍

Meanwhile, Standard Chartered Bank says that Monday's selloff may ease and offer opportunities for bottom-fishing. This could be a good opportunity for investors to buy stocks at a lower price.
‍

Samir Gadio, the London-based head of Africa Strategy at Standard Chartered, said that the unexpected downgrade has caused the external bonds to sell off this morning. Some investors are wondering if this is a good opportunity to buy at a lower price.