HEADING EAST FOR PANDA BONDS
According to the Financial Times, Nigerian government intends to issue debt in the panda bond market. Basically, panda bonds are renminbi-denominated debt sold by foreigners into China’s bond markets. Its profile has improved remarkably since Chinese administrators agreed to relax their control over the value of the renminbi and the IMF voted to include the Chinese currency as part of the basket of reserves that make up the Special Drawing Rights.
In the news report, Nigeria’s finance minister, Ms. Kemi Adeosun, said her intention is to borrow as cheaply as possible hence this surprising choice. She also hinted at the possibility of issuing Yen-denominated bonds in the Japanese bond market, otherwise called Samurai bond market. Another thing to add in this light is nascent effort by the Central Bank of Nigeria to increase its holding of the yuan — alternative name for renminbi — in its foreign reserves. This comes in recognition of the increase in trade between Nigeria and China, as well as the massive depreciation of the naira against the dollar in the parallel market.
It is understandable that the Nigerian government would want to borrow as cheaply as possible. It has an $11 billion budget deficit to fill this year but would panda bonds be any cheaper than eurobonds which it was originally scheduled to issue last month?
The answer to that question is not immediately obvious. While corporate bonds that have been issued in the panda market have generally enjoyed low yields, there are few examples of sovereign bond issuance to draw lessons from. So far, South Korea and British Columbia are the only sovereign entities to have exploited the onshore panda market. (China has an offshore renminbi bond market called dim sum market that enjoys more patronage internationally but relatively costlier pricing.)
There are regulatory and liquidity issues to contend with in the panda bond market. As it is, issuance is approved on case by case basis and ability to take funds raised out of the country is a decision that has to be reached with Chinese authorities because of capital controls. Nigerian government must make sure it understands the full implication of bond issuance involved in this market. Issuing at low yield only to contend with huge transaction costs would be penny wise but pound foolish.
Also, there appears to be lot of disparities in the rating of these bonds. Domestic and international credit rating agencies often have widely different outlooks on panda bonds. Also, rather surprisingly, some panda bonds are deemed exempt from domestic rating. This is as concerning as it is curious. However, it may actually work in the favor of Nigeria. Currently, Fitch rates its long-term foreign currency debt at BB-. With this junk rating, it is very unlikely that the government would be able to borrow in a more transparent bond market at a favorable rate. Hence, a panda bond may be favorable at this time — if only for the short run.
Without prejudice to the foregoing point, it is important to ask why Nigerian government has to go as far as China to borrow in a largely untested fixed income market when only three days ago South Africa issued a $1.25 billion 10-year global bond at an impressive coupon rate of 4.875%. This came amid the political tension in the country and repeated threats by Moody’s and others to lower South African credit ratings to junk. Nigeria is in a similar situation as South Africa if not better. While oil price has tumbled there is a sense of political stability and relatively better economic fundamentals in the West African nation. Surely, it could also get cheap rates in the global bond market at a time when Europe is beset with negative interest rates and America is unlikely to raise its federal funds rate.
If Ms. Adeosun succeeds in borrowing in the panda bond market at a rate 10 basis point lower than she would otherwise get elsewhere it would be a coup. However, in the grand scheme of things this discussion should matter little for a market is just a place for buyer to meet seller. As a young Nigerian I have bigger worries. While I think the expansionary fiscal policy the government is pursuing is necessary to improve growth and opportunities, I have my sight on the long run fiscal imbalance of the nation. Will future revenue be sufficient to cover future expenses, part of which is interest payments on current debt? That’s a question even Ms. Adeosun may be hard put to answer.