Morgan Stanley said it had turned “bullish” on Nigeria’s government bonds on Thursday on hopes the declared victor in the country’s presidential elections, Bola Tinubu, will soon press on with key fiscal and financial market improvements.
“In the short-to-medium term we think that there are potential positive triggers,” the Wall Street bank’s main analyst for the country, Neville Mandimika, wrote in a note, entitled, “As the dust settles, we turn bullish.”
Tinubu, whose victory in Saturday’s election with 37% of the vote is being challenged by rivals in court, made a number of pledges on reforms during his election campaign.
Morgan Stanley said positive triggers could include signals that costly fuel subsidies will start to be phased out, a much-anticipated oil refinery will get up and running this year and that the country’s multiple exchange rates will be addressed.
That could push up bond prices and mean the “spread” – banker speak for the premium emerging market governments have to pay to borrow compared to the United States – could come down.
Mandimika said the bank’s preference would be to buy Nigeria’s February 2032-maturing bond versus one of Egypt’s 2029 bonds. “We move the sovereign from neutral to a like stance,” he added.
Despite these catalysts, he cautioned that the longer-term fiscal trajectory in Nigeria, Africa’s largest economy, is likely to remain an underlying concern.
Nigeria’s federal tax revenue to GDP ratio will be a modest 10% compared to between 13-16% in many of the country’s closest emerging market peers, he calculated.
This implies that the government’s interest costs relative to revenue will remain painfully high, especially if inflation continues to push up domestic funding costs. It currently sits at a ratio of 57% using federal revenue figures, Mandimika estimated.
The IMF estimated that Nigeria’s federal government spent 96.3% of its revenues paying interest in 2022.
