In less than three short years Nigeria’s economic story has changed from one of hope to one of concern – set off by a collapse in the oil price in mid-2014. A major concern has been the naira, which is still believed to be over-valued even after the Central Bank of Nigeria removed its peg to the dollar in June last year. The official exchange rate remains managed through stringent trading restrictions while on the black market the naira’s exchange rate has plummeted.

As a result, capital importation via foreign direct investment (FDI) into Nigeria has suffered – nose-diving from US$768.86m in the fourth quarter of 2014 to $344.68m in the fourth quarter of 2016, according to the country’s National Bureau of Statistics. The quarterly Business Expectations Survey also reflects a fall in business confidence in Nigeria over the period.

However, despite this, Nigeria’s dollar debt remains attractive to international investors. Last week the country returned to the Eurobond market (for the first time in almost four years), issuing a $1bn 15-year bond at a yield of 7.875%. After a roadshow, led by finance mnister Kemi Adeosun, it turned out Nigeria’s debt had no trouble attracting investment and it ended up being nearly eight times oversubscribed.

“Given this outcome of this bond issuance, it shows that investors are still confident that the long term will remain positive,” says Gaimin Nonyane, head of economic research at Ecobank. “But the short term, of course, will be painful. Had they issued a short-term bond, I don’t think it would have been as over-subscribed like with the bond they have just issued.”

Yvonne Mhango, Renaissance Capital’s sub-Saharan Africa economist, explains that part of the reason behind why Nigeria’s Eurobond has received so much investor interest, yet the country is receiving less FDI, is because FDI is more exposed to the naira’s exchange rate uncertainty.

“Whereas with the Eurobond, why you see such a big interest is because the investment is in a dollar bond. You will get paid dollars for it so you so you aren’t getting involved in the whole issue of getting into a naira investment and then having to convert that into dollars,” adds Mhango.

“If this was a case of trying to draw investors into [Nigeria’s] local debt market – by buying naira treasury securities – then you would have seen very low interest.”

Nigeria’s latest Eurobond oversubscription also represent a strong appetite by investors for higher yields in today’s lower-yield global environment, notes Nonyane

“For you to get 7% [plus] long term, I think it’s a bargain. It’s a good deal for any foreign manager.”

An expensive choice

While Nigeria’s latest Eurobond issuance is set below the initial yield guidance of about 8.5%, it is still one of the more expensive funding options for the country. According to Nonyane, Nigeria could have chosen cheaper sources of debt by approaching the IMF. These concessional loans could have been priced below 3% interest, she notes.

“But of course that comes with a lot of conditions, and I think Nigeria is at a stage where it is too proud right now to start thinking of taking all the conditions that would come with cheaper loan from the IMF.”

Nigeria’s Eurobonds issued in mid-2013 were also slightly cheaper with yields on its $500m five-year bond and its $500m 10-year bond priced at 5.375% and 6.625% respectively.

“Now they are paying more… which is expected given all the macroeconomic challenges that they are facing in the economy,” says Nonyane.

“This shows that the economy is seen to be more risky now than it was in the past.”

She adds that Nigeria might have been rewarded a lower yield had investors felt the naira wasn’t so overvalued.

“That was the elephant in the room even during the roadshow. Investors were asking what was happening with the exchange rate policy and if they would devalue – because as an investor you need price transparency,” she explains.

“Nigeria’s foreign exchange rate policy is next to nothing. You just don’t know what is happening and there is a lot of uncertainty around it. The foreign exchange market is highly fragmented with about 10 various exchange rates hovering around.”

However, Nigeria’s debt costs are still cheaper than Ghana’s $1bn 15-year Eurobonds in October 2015 priced at 10.75% and its $750m five-year issue last year at 9.25%.

“Nigeria is a bigger economy,” Nonyane explains. “It still has a lot of positives in terms of its population and oil reserves…. Ghana is a smaller economy. In terms of the multiplier effect, it would not be as significant as you would have in Nigeria, or even demand for consumer goods.”