Nigeria Plans Yuan Stock Pile, To Issue ‘Panda’ Bonds

As part of the decisions reached by President Buhari and President Xi Jinping, during his working visit to China, Nigeria might be reaching deeper bilateral agreements with China.

A key part of the agreement sealed at the visit is a $6 billion loan China will promised to extend to Nigeria. The loan is an infrastructure loan that will be channeled to rail construction. In return, Nigeria will increase its Yuan currency reserves. Lin Songtian of the Chinese Foreign Ministry said, the implication of the deal means Nigeria and Nigerians can now trade freely using the Renminbi to settle transaction

Speaking to Reuters, Lin said “It means that the renminbi (yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria,”. Nigeria had started increasing its exposure to the Yuan about five years ago, converting up to 10% of the national reserve to Chinese Yuan.

Moreover, Nigeria plans to issue ‘panda’ bonds (Renminbi denominated) bonds to cover budget deficit. President Buhari had in his 2016 budget proposal, which is yet to be signed by him, made provision for about N2.2 trillion deficit to be financed by local and foreign borrowing.

The planned Panda bonds might be taking a sizeable part of the deficit. This decision is also key to Nigeria’s access to foreign credit as the Morgan Stanley Capital International Index, MSCI and a bond index that track emerging market bonds plans to delist Nigeria if the country’s forex controls and lack of critical reforms persist. Nigeria had already been delisted from the JP Morgan emerging market index in the late part of last year. Looking towards the East with a bond that is local to the Chinese investors might bring respite to a country already in dire strait of funds to deliver public infrastructure and meet critical financial obligations.

However some analysts are having opposing views. Many investors have taken a short position on the Yuan against the USD. The USD has been outperforming the Yuan since the global rally in the oil market got to its peak. They argued that Nigeria’s plan to increase its reserve for the Yuan is shortsighted and might put itself at the risk a depreciated Yuan against the USD, a currency Nigeria still needs for other trade activities that China cannot provide.