With a 25% return over the last year, Nigeria’s dollar bonds have become one of the best-performing assets in the world as investors have come around to the fundamental changes in the largest economy in Africa.
In comparison, South Africa’s – the second-largest economy’s bonds – have only returned 4.4%, and due to the country’s political and budgetary difficulties, foreign investor holdings are at an all-time low, according to a Bloomberg report.
While a football rivalry gets more intense – Nigeria edged past South Africa at the African Cup of Nations semi-final on penalties – there’s no contest for who’s already won in the bond market.
The two countries are experiencing different fortunes, as South Africa is dealing with budget deficits and corruption problems, while Nigeria’s President, Bola Ahmed Tinubu, has implemented several economic improvements since winning presidential elections about a year ago.
An emerging markets strategist at Societe Generale SA in London, Gergely Urmossy, told Bloomberg, “The market is buying into the idea that Nigeria has enough hard currency on its balance sheet. Given the government’s reformist agenda, fundamentals are more likely to improve than worsen.”
Although, according to a Bloomberg index, the average performance of its emerging market and frontier peers is just 5.8%, Nigeria’s bond returns place it in the worldwide top 10, nonetheless below countries like Tunisia, Pakistan, and Argentina.
Tinubu, who won elections held last February, plans to simplify the country’s tax laws and improve electricity supply this year, following moves to end costly fuel subsidies and relax the country’s complex exchange-rate regime.
Although Urmossy stated that the changes in the country’s Central Bank and finance ministry’s communication would likely take time to show benefits, market participants claim that they can now more precisely price Nigerian assets.
A significant portion of the potential is already priced in, as seen by the debt’s declining risk premium as compared to South Africa.
Urmossy further said, “The next leg is following through and delivery. Without delivering, the spread could widen again if fatigue takes over the market awaiting the reform results.”
In contrast, given the government’s increasing need for funding, investors in South Africa are concerned about Finance Minister Enoch Godongwana’s budget later in February. According to Fitch Ratings, the consolidated budget deficit is expected to significantly exceed official projections this year, rising to 4.8% of the gross domestic product.
In addition, the country will face general elections this year in the wake of several corruption prosecutions and problems at state-run rail and port operator Transnet SOC and energy utility Eskom Holdings SOC Ltd.