Nigeria joined the JP Morgan Government Bond Index-Emerging
Markets (GBI-EM) last month, the second African country to join
after South Africa, and this is likely to generate
substantial capital inflows, thereby helping deepen the
local debt market and boost the naira, Societe Generale
emerging markets strategist Souheir Asba said.
This should overall be positive for the NGN (Nigerian
naira), assuming no major issues in the fiscal calendar of the
new government, she said.
The currency appreciated to the highest level in 2 weeks
last week, as portfolio inflows from investors buying
fixed-income securities rose.
At the beginning of November, S&P raised Nigerias
rating by one notch to BB-, with a stable outlook, saying that
the fiscal assets in the Excess Crude Account (ECA) rose to
about $8.4 billion in October, which provides a
reasonable fiscal buffer and its external reserve buffers
had also been strengthened due to strong exports and high oil
Fiscal assets in the ECA were around $2 billion at the end
The West African country is the continents top oil
producer and Asba said the oil sector is another reason why
Nigeria is her favorite frontier market pick.
While we anticipate an increase in portfolio inflows,
the main source of inflows will continue to be FDIs (foreign
direct investments), mainly in the oil sector, she
Nigeria is making substantial efforts to enhance
its non-oil sector to cure its Dutch disease, but
it still depends heavily on oil exports, according to
Reform momentum continues, the S&P said after its recent
upgrade, citing measures taken by the government over the past
year such as halving the fuel subsidy, overhauling the
electricity sector and raising electricity tariffs.
The main source of risk is the fiscal policy, as there has
been no agreement on what oil price to include in the budget.
They key issue, said Asba, is to find an optimal benchmark that
would allow increasing oil revenues to fund the rising
government spending on wages and infrastructure.
We believe that the Finance Minister is right in opposing
a high benchmark as it is, in our view, too optimistic taking
into consideration high probability of slowing demand of oil in
2013, she added.