Protests Weigh Heavily on Nigeria’s Economy as Sovereign Risk Premium Hits 8-month High

By Chukwuma Umeorah

Owing to the current wave of cost-of-living protests in Nigeria which has significantly impacted its economy, the nation’s sovereign risk premium have surged to an 8-month high.

This notably impacted the performance of the Nigerian Euro bonds in the market. According to Bloomberg, the biggest laggard was the 2051 bond, the price on which slid to 75.4 cents on the dollar as of 12:36 p.m. in London — down 1.4 cents on the day and the lowest in over a month.

A sovereign risk premium is defined as the difference between the long-term government bond yield and the shadow interest rate.

With this development, there are concerns that these protests might derail President Bola Tinubu’s economic reform plan.

The unrest has resulted in the deaths of at least 13 people and sparked fears among investors that Nigeria might follow Kenya’s recent path, where violent protests forced the government to retract crucial revenue-raising measures.

Political noise and “a challenging context for reform,” are weighing on Nigerian bond prices, according to Citigroup Inc. strategists Alexander Rozhetskin and Luis Costa.

“The sovereign bonds have been lagging over the last two months, particularly in the last weeks, as the noise around the cost-of-living protests is increasing,” they said in a note sent on Aug. 1.

On Friday, the extra average yield investors demand to own Nigeria’s debt relative to Treasuries, rose 23 basis points to 647 basis points, according to indicative data from JPMorgan Chase & Co. If the spread closes at this level, it would be the highest since November.

Reforms introduced by Tinubu include the scrapping of costly fuel subsidies, and allowing the naira currency to trade more freely in a bid to attract foreign capital inflows.

However, the protesters are campaigning against the policy changes which have driven inflation to a near three-decade high in a country where 40 per cent of the population lives in extreme poverty. Organizers of the demonstrations have called for 10 days of protests through Aug. 10.

However, the Citi strategists do not expect the Nigerian protests to reach the scale of the recent unrest in Kenya, where the government was forced to abandon measures seen as crucial for increasing budget revenues.

For that reason, they maintain their “middleweight” rating on Nigerian bonds, adding “the curve may start to look attractive on a relative value basis.”

Source: THE SUN

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