Having been in the pipeline for some time now, Nigeria’s $300m London Stock Exchange-listed diaspora bond went down very well with investors, being 130% oversubscribed.
Having shared similar successes with the issuance of eurobonds, could diaspora bonds pave the way forward for a more successful Nigerian economy in the years to come?
What Is a Diaspora Bond?
A diaspora bond is a bond issued by a country that targets investment from nationals living abroad (hence diaspora). It acts as a patriotic way for nationals to invest in the future of their home country. Migrants are usually offered the bond at a discount rate.
The bond shares similarities with eurobonds, given that they are issued in a currency outside of the country issuing the bond (so Nigeria’s bond will be issued in dollars as opposed to Nigerian nairas.) There is some scepticism around the bonds, given that banks may not know whether investors are actually expatriates.
A Cost-worthy Issuance?
In 2014, roughly $21bn was received by Nigeria in remittances, making this $300m issuance a fairly modest amount relatively speaking. Further, the nation’s last two Eurobonds were worth $1bn and $500m, and both were oversubscribed. This raised the potential issue of the bond not be cost effective given that it would be registered with the SEC, and expensive process. Nigeria nevertheless took the risk and the oversubscription signals that it paid off. The bond was issued at a coupon rate of 5.625%.
A Sturdy Economy?
The 130% oversubscription was a huge indicator of the positive investor sentiment in the Nigerian economy, which has actually been cash strapped for the last two years.
The depreciating value of oil has been a large part of this. As America’s supply glut shows no signs of diminishing, oil prices have been struggling of late and are currently fairly settled around the $45 per barrel range. This has had an adverse affect on revenues, and the naira, notably after the government devalued the currency.
One has seen Middle Eastern countries gearing themselves to shrug off their oil dependencies such as through Saudi Arabia’s Vision 2030, and Nigeria must look towards a similar ambition if its economy is to prosper in the long term.
The economy has been in recession for the last five quarters, failing to demonstrate any consistent strength – so why is the bond so popular?
A Worthwhile Investment?
Perhaps the central role of diaspora bonds is to bring out the patriotism of expatriates. The bond offers an opportunity to have a direct impact on the progression of the country, especially if the proceeds are used wisely, for example on infrastructure projects.
However, these expatriates are investors first and foremost, and hence would not agree to such an endeavour based purely upon a “feel good factor” often associated with charitable donations.
In a time of recordlow-interestt rates, investors are increasingly looking to alternative investments to see higher returns. Nigeria’s diaspora bond offers this, and the discount rate given to expatriates furthers the incentive to invest.
In addition, investments in emerging and frontier markets have been increasingly popular due to their higher yields, despite the higher risk that comes with them. A prime example is Argentina’s 100-year bond, which proved popular despite the country defaulting on its debt seven times in the last 200 years and three times in the last 23 years.
Additionally, diaspora may value the impacts of their investment more through the bond rather than remittances to family members. This could, however, swing the other way given the distrust of many African governments, including Nigeria’s.
For Nigeria, this bond is a welcome reassurance that investors still see positives coming out of the economy. Having now issued eurobonds and a diaspora bond, the country will continue to diversify its capital raising tools, with the Islamic Sukuk said to be next on the agenda.
Investors will hope that Nigeria can slowly edge away from oil dependency and that the capital raised be used effectively to stimulate the economy out of recession.
The diaspora bond will continue to be an interesting tool that divides opinion, with some arguing that it provokes a more emotion-based investment rather than a value or growth-based one.