Buhari was in China for the past four days negotiating the funding package. Initial reports put the size of the deal being negotiated by the two countries at roughly US$2bn.
So far details of the deal are scarce. As part of the move the Central Bank of Nigeria (CBN) and the Industrial and Commercial Bank of China Ltd (ICBC) have signed an agreement that will ease yuan transactions in Nigerian banks, in exchange for the renminbi being included in the foreign exchange reserves of Nigeria. China has currency swap deals in place with a range of developed and emerging market central banks.
“It’s a positive sign that the [Nigerian Central] Bank is diversifying away from the US dollar as a reserve currency – given the strides China is making internationalising its currency and the increasing popularity of the yuan on the continent, it’s an interesting move,” a currency trader told Bonds & Loans. “The proportion of yuan relative to other currencies in that basket is likely tiny, but it also sends a signal to other African economies – where China is particularly active, which could be interpreted as a win for China.”
Last week Nigeria’s finance minister Kemi Adeosun said the country could look to Japanese and, particularly, Chinese offshore bond markets to help plug its US$11bn budget deficit – at a time when the country wants to nearly triple capital spending to boost economic activity. It would be the country’s first Panda bond, and the first time it issued debt internationally since 2013 when it sold US$500mn five and 10-year notes.
Nigeria’s cost of debt has been steadily rising since its last international debt issuance; during that time the government has borrowed heavily as the price of oil dropped to staggering lows. Yields on its US$500mn five and 10-year notes were 5.38% and 6.63%, respectively, when issued in 2013.
New five and 10-year notes auctioned in March were marked to yield 11.334% and 12.17%, respectively. Standard & Poor's rates Nigeria at B+, while Moody's and Fitch give the sovereign a Ba3 and BB-, respectively.
As a result, many analysts believe Nigeria will be able to secure cheaper pricing if it inks loan deals with large multilaterals and other states.
“We don’t really know much about the terms of the loan, so there are still questions about how the deal will benefit China,” explained Michael Kafe, an Africa-focused economist at Standard Bank. “But to the extent that this is indeed a US$6bn credit facility, it’s good news for Nigeria.”
Kafe said the deal will likely ease some of the pressure on foreign exchange reserves – which have suffered due to a massive drop in oil export revenues – and potentially, the country’s need to hit alternative borrowing markets. But the latter will largely depend on the terms associated with the facility, which have yet to be publicly disclosed.
“It also means there will be less pressure on the authorities to devalue the currency right now because they would have the inward capital to fund their capex program,” Kafe added.