Paul Wallace and David Malingha Doya Nairobi
INVESTORS skittish about Nigerian assets as plunging oil prices pummel the nation’s economy are casting their eyes across the continent to Kenya.
Yields on Kenya’s 10-year Eurobonds, which were 128 basis points higher than comparable Nigerian debt when they were sold in June, are now 57 basis points lower, according to data. Kenya’s local currency securities have returned 0.4 percent in dollar terms this year, compared with an 8.3 percent loss on naira debt.
The World Bank raised its growth forecast for Kenya on March 5, saying oil prices that have tumbled 48 percent since June would boost the economy of the nation, a net importer of crude. By contrast, Nigeria was set to slow, the International Monetary Fund said the same day. The continent’s biggest oil producer is struggling with falling export revenue and a loss of investor confidence after it postponed elections amid the insurgency by the Islamist group Boko Haram in the country’s north-east.
“Some investors think it makes more sense to be overweight Kenya versus Nigeria,” Mahan Namin, a money manager at Insparo Asset Management, which sold its Nigerian sovereign bonds last year and has bought more Kenyan debt in 2015, said on March 10. “The divergence with Nigeria is a case of Kenya’s revenue base being more diversified and oil prices being lower.”
Creating jobs
Kenya, with 41 million people and a gross domestic product of $55 billion (R677.5bn), is the biggest economy in East Africa, with tea, coffee and tourism among its main sources of foreign exchange. Investments in infrastructure, agriculture and manufacturing are creating more jobs and should increase growth to 7 percent by 2017, the World Bank said after upgrading this year’s projection to 6 percent from 4.7 percent.
While Nigeria dwarfs Kenya with its $520bn economy and population of 170 million, it relies on oil for 90 percent of export earnings and 70 percent of government revenue. The plunge in oil prices will slow growth to 4.8 percent in 2015, compared with 6.3 percent in 2014, the IMF said.
“Kenya has managed to diversify,” Lamin Manjang, the chief executive of Standard Chartered’s East Africa unit, said on March 9. “It is not a commodity-driven economy” like Nigeria, he said.
Morgan Stanley and Aberdeen Asset Management were among investors that said they sold all their Nigerian local bonds in the past six months as the naira weakened 18 percent against the dollar, the most among 24 African currencies tracked by Bloomberg. Kenya’s shilling depreciated 3.1 percent in the period.
Outperformed
“The currency has definitely outperformed Nigeria’s,” Kaan Nazli, a senior economist at Neuberger Berman Europe in The Hague, said on March 9.
Yields on Nigeria’s $500m of bonds due July 2023, rated three levels below investment grade by Moody’s Investors Service, climbed 95 basis points in the past year to 7.01 percent yesterday in Lagos. Yields on Kenya’s $2 billion of debt due June 2024, rated one level lower, dropped 16 basis points since a sale in June to 6.44 percent.
The yield divergence will continue at least until after Nigeria’s presidential election on March 28 and as long as oil prices stay low, says Marco Ruijer, who helps manage $7bn of emerging-market debt at ING Investment Management in The Hague.
“There’s a lot of political turmoil in Nigeria and it’s trading almost one-for-one with oil prices,” Ruijer said. “If oil remains around $60 a barrel, then Kenya will trade inside Nigeria. If prices rise to $70 or $80, that gap should disappear.” – Bloomberg