Nigeria bonds surge on weekend ouster of Central Bank Chief
Nigeria’s international debt surged after the surprise weekend ouster of the central bank governor, with investors betting his removal will allow President Bola Tinubu to better pursue his promise of resetting monetary policy settings that have been blamed for crippling Africa’s biggest economy.
Governor Godwin Emefiele was suspended by Tinubu after the markets closed on Friday, and then detained by Nigeria’s state security service a day later for unexplained “investigative reasons.” Folashodun Shonubi, a deputy governor in charge of operations at the bank, took over in an acting capacity.
While the maneuver raises questions about political feuds impacting economic policy, investors have welcomed the change because it signals a move away from unorthodox policies implemented by the former bank chief. Emefiele’s policies — including propping up the naira, restricting foreign exchange for imports, and focusing on development finance — had long been criticized by investors, economists and institutions like the World Bank. Under his tenure, the central bank also loaned the government of former President Muhammadu Buhari 22.7 trillion naira ($49 billion), helping push public debt to a record 77 trillion naira.
Nigeria’s international bonds jumped the most among emerging-market peers at the open on Monday, with its longest-dated dollar bonds rising to the highest since January. The notes maturing in 2051 rose nearly 3 cents on the dollar to as high as 73.45, the biggest gain since April.
Analysts said the outcome of Emefiele’s removal should be that Nigerian bonds strengthen while benchmark interest rates may rise as the nation’s assets become more attractive to foreign investors. The scrapping of a multiple exchange-rate regime, meanwhile, is likely to lead to the devaluation of the naira.
“This could spell the end of unorthodox and often conflicting and confusing monetary policies that held back economic growth and destroyed local and foreign investor confidence,” Ayodeji Dawodu, head of Africa sovereign and corporate credit research at BancTrust & Co. in London, said by phone.
“The market will receive the removal of Godwin as a positive development, as his unorthodox policies had become an impediment for Nigeria,” Ronak Gadhia, director of Sub-Saharan banks research at EFG Hermes, said by email. “His removal should be viewed as positive and could lead to increased risk appetite for Nigerian bonds and equities.”
Suspension and Detention
Emefiele was widely seen as acting in lockstep with the administration of Tinubu’s predecessor, Buhari. That government was perceived to be more statist and socialist in its approach, said Yemi Kale, chief economist for Nigeria at KPMG LLP and the nation’s former statistician general. “The markets will respond positively to an administration it believes to be more market oriented,” Kale said.
Tinubu criticized the country’s central bank in his May 29 inaugural address, vowing to unify the multiple exchange rates in order to “direct funds away from arbitrage into meaningful investment in the plants, equipment and jobs that power the real economy.”
Under Emefiele, Nigeria’s central bank offered the US dollar through several windows at tightly controlled rates with little liquidity to businesses and individuals. This forced many to the black market, where the dollar traded more freely but at about a 60% premium to the official rate.
“To be credible, the implementation of policy changes would most likely need a new team,” Ayo Salami, chief investment officer at Emerging Markets Investment Management Ltd. in London, said via email, explaining the market reaction to Emefiele’s ouster.
Naira Devaluation
The current naira exchange rate of 471.92 naira to the dollar, a record low, likely needs to be adjusted to about 700-750 naira, closer to the current black-market rate, JPMorgan said in an investment note on May 31. “Our baseline expectation is that an adjustment to these levels is likely, barring significant upside to oil prices or production,” the bank said.
The naira has closed lower for three consecutive days, its longest streak of losses since May 12. Analysts expect that the currency could trade anywhere between 650 to 750 to the dollar as Nigeria allows it to trade more freely. Domestic trade will resume on Tuesday as Monday is a public holiday in Nigeria.
A naira at that level, combined with Tinubu’s decision to remove a costly gasoline subsidy, “means the government does not have [to] borrow as much, just to pay interest on debt,” Charlie Robertson, head of strategy at FIM Partners, said in a series of posts on Twitter.
