Market News

BY Emmanuel Addeh in Abuja with agency report

The economic reforms embarked upon by President Bola Tinubu are sparking the biggest bond rally in Emerging Markets (EMs), with the country having the best performance among 23 markets in July, a Bloomberg news report said yesterday. This is as the West African nation’s two-digit carry yields continue to be backed by increasing government revenue, slowing inflation and a stable currency.

Naira-denominated bonds of Africa’s largest crude producer have extended their 2025 rally with an 8.6 per cent total return in July, the best performance among the 23 countries in the Bloomberg EM Local Currency Government Universal Index both for the month and the year, Bloomberg added.

Since coming to power in May 2023, Tinubu has eliminated fuel subsidies, weighing on the government’s budget. He followed it up with a tax overhaul, while the central bank has allowed the naira to trade more freely. The measures have helped to reduce the fiscal deficit, boost reserves and keep the current account in surplus. Besides, investors are just beginning to back the reforms, after staying on the sidelines for most of 2024. “The optics have been constructive this year for Nigeria,” said Head of Trading at the Bank of Africa UK Plc in London, Matthew Reed.  “The currency has stabilised after a volatile 2024, and this removes a notable hurdle for many international accounts looking to invest in the local bond market,” he added.

The latest gains are a turnaround for Nigeria’s local-currency bonds, which posted the biggest losses among emerging and frontier markets last year as global money managers still doubted if Tinubu’s reforms will continue. But with inflation falling from a 28-year high and currency volatility ebbing, confidence in his programmes has grown. Naira’s 30-day historical volatility has fallen from 23 per cent in December to 4.6 per cent now, according to data compiled by Bloomberg. Inflation has cooled for a third straight month in June to 22.2 per cent, while the central bank has held the benchmark rate at 27.5 per cent.

Government revenues increased 43 per cent in the first half compared to the prior period, and recent tax changes are seen boosting revenue collections further. A rebasing that increased Nigeria’s gross domestic product by 30 per cent has improved debt ratios and opened the room for better ratings and fresh borrowing. The lower inflation, expectation of rate cuts and a more stable naira have made Nigeria a more attractive investment case, said a Sovereign Analyst at PineBridge Investments in London, Joseph Cuthbertson . Nigeria is on a “positive macroeconomic trajectory following its reform efforts,” leaving local debt attractive, he said.

The July rally in naira bonds extends year-to-date gains to 26 per cent, compared with an emerging-market average of 7.1 per cent. This partially recoups a 40 per cent loss suffered by investors last year. A credit upgrade this year by Moody’s has also helped, said the head of Nigeria’s Debt Management Office (DMO), Patience Oniha.

The ratings company raised Nigeria from Caa1 to B3 citing “significant improvements in the country’s external balance and fiscal position.” That placed it on the cusp of “re-entering the broader pool of emerging markets considered investable by institutional debt investors,” Moody’s said. Despite recent gains, Nigeria’s local bonds are “still attractive,” said Aurelie Martin, a fixed-income analyst at Ninety One. The naira has found some stability “reaping the benefits of the tough monetary and fiscal reforms of the past couple of years,” while slowing inflation will enable the central bank to cut rates supporting naira notes further.

Meanwhile, Nigeria and other African borrowers are regaining access to international capital markets, offering governments and companies a fresh opportunity to diversify their funding sources after years of being locked out,  Citigroup Inc, has said. “With rates coming down now, I think the markets are reopening to African issuers, namely the European markets,” Managing Director and Vice Chair of Investment Banking for Middle East & Africa at Citigroup, Miguel Azevedo, said at the EurAfrican Forum near Lisbon yesterday.

He cited an international share sale this month by Guaranty Trust Holding Co. of Nigeria, the lender’s first such offering, as an example. Separately, Ivory Coast raised 50 billion yen ($338 million) in samurai bonds, the country’s first, last week. The extra yield investors demand to hold dollar bonds from African nations rather than US Treasuries, known as the sovereign spread, fell to 429 basis points this week, the lowest since December, according to JPMorgan Chase & Co. indexes. The spread has narrowed more than 200 basis points since April, when US President Donald Trump’s tariff announcements roiled bond markets.

Azevedo said the larger flow of funds from Europe into Africa compared to the US could actually be a “blessing in disguise” because it is helping some nations to further diversify their economies and is boosting intra-continental trade.

“Forcing local trade I think it will be good for Africa,” he said. “The world is becoming less global and it may actually help Africa. When you look at trade in Africa, it’s all about how much you can do domestically these days,” Azevedo noted.