- Risks to Nigeria Assets Surge to Record High
Numbers of recent events have bolstered Nigeria’s risk premium as investors are demanding a higher yield to hold Nigerian assets following P&ID judgment.
Nigeria’s risk premium rose the most in 2019 this week as global oil prices continue to drop amid the uncertainty surrounding trade war and the Brexit.
Also, the new judgment by a British commerce court, awarding $9 billion in foreign reserves to P&ID, hurt investors’ confidence as they have started pricing in that possibility despite central bank’s promise to protect the foreign reserves.
“The P&ID $9bn claim was like a sucker punch to investors who were already concerned about lower oil prices,” said Tajudeen Ibrahim, head of research at investment bank, ChapelHill Denham.
“The risk premium is likely to widen further if oil prices continue falling, because the CBN will be forced to raise rates to compensate for the additional risk investors are taking,” Ibrahim added.
A risk premium is an excess return over the risk-free rate that an investment is expected to yield. Therefore, a risk premium is an extra compensation an investor is expected to be paid for taking extra risk.
The US bond is considered risk-free, therefore, other sovereign risk premiums are determined by comparing the extra yields on their local bonds to that of the US.
On Monday, the yield on US ten year treasury bond was 1.6 percent, while Nigerian investors were demanding 14 percent if they were to hold Nigeria’s one-year treasury bill. Representing an increase of 12.4 percent. This was after Friday’s reports that a British commerce court has granted P&ID right to deduct $9 billion from Nigeria’s foreign reserves.
Investors were worried that a $9 billion deduction from the current $44 billion foreign reserves would hurt central bank’s ability to intervene in the foreign exchange market and stabilise the Naira, especially with the oil trading below its 2019 benchmark ($59/barrel).