Nigerian Finance Minister Kemi Adeosun plans to travel to China next week, aiming to negotiate a loan of up to $2 billion to help fund record budget spending, financial and government sources said on Wednesday.
They also said Nigeria - which is suffering its worst economic crisis for decades - has shelved plans to meet investors about returning to commercial borrowing on the Eurobond market.
One Nigerian government official told Reuters that any loan agreed during Adeosun's trip could be signed by President Muhammadu Buhari in Beijing next month.
"The finance minister, in the company of the central bank governor, is scheduled to be in China sometime next week to conclude negotiations on the $2 billion loan," said the official, who asked not to be named.
With China largely closed for the Lunar New Holiday, it is unclear how keen Beijing is on the idea, or how tough a bargain it might demand.
The official acknowledged negotiations had been underway for some time and that the terms had yet to be agreed. However, he added: "Hopefully it may be sorted out during this meeting and the loan will be signed during President Buhari's visit to China in March this year."
The central bank could not confirm whether Governor Godwin Emefiel would be joining Adeosun.
Nigeria wants to raise about $5 billion abroad to cover part of its 2016 budget deficit. This is projected to hit 3 trillion naira ($15 billion) due to heavy infrastructure spending at a time when the slump in global oil prices has slashed it export revenues.
Buhari, who was elected in March 2015 on a promise to fix the West African country, wants to turn around the economy by investing in power plants and transport, ending a development paralysis under his predecessor Goodluck Jonathan.
The president asked China in December to fund rail and power projects and Adeosun, who already visited Beijing last week, has raised the possibility of seeking a loan from the Export-Import Bank of China.
No Road Show
Nigeria had wanted to raise $1 billion from Eurobond investors but has dropped plans to sound them out at a non-deal "road show" which the finance ministry had tentatively planned for March, financial sources say.
"They will wait a bit with a road show as they wouldn't be able to get a good deal," said one source familiar with the finance ministry plans.
With world markets in turmoil, investors are wary of lending to anything but highly-rated rate emerging economies. Nigeria's reluctance to devalue the naira currency, which has plunged on the black market, would further discourage investors, meaning the cost of commercial borrowing would be prohibitive.
That puts pressure on Africa's biggest economy and top oil producer to borrow more from other sources such as China. Nigeria had up to now planned to raise around $4 billion at concessionary interest rates from sources such as the World Bank.
While the government official foresaw a $2 billion China loan, a financial source put the amount at more than $1 billion. The finance ministry could not be immediately reached for comment.
Adeosun has said Abuja has held "explanatory talks" with the World Bank. It has also asked the African Development Bank for a $1 billion budget support loan.
A World Bank loan would probably be tied to specific goals with strings attached. As well as infrastructure projects, Nigeria also wants loans to refinance existing debt, one financial source said - an idea that would be hard to sell to the World Bank or other development-focused lenders.
The World Bank has confirmed talks have been held on "Development Policy Operation" funding, which typically aims to improve infrastructure and create jobs. The multilateral lender has been studying projects to fight poverty in northern Nigeria, where the jihadist Boko Haram group is waging an insurgency.
Freeing the Naira
If talks with China or multilateral agencies fail, Nigeria would struggle to find willing commercial lenders.
"It's going to be difficult for issuers to come to market now unless they are at the high end of the credit quality spectrum," said Zsolt Papp, client portfolio manager at JPMorgan Asset Management.
Reflecting the higher risks as Nigeria struggles with sharply reduced oil revenue, the average yield spread on its sovereign dollar bonds – the premium investors demand to hold them over U.S. Treasuries – has climbed to 713 basis points.
That is a rise of 100 basis points since the start of last month and more than double levels a year ago, according to the EMBI Global emerging debt index. Nigeria's 2023 bond issued in 2013 with a coupon of 6.37 percent is now yielding almost 9 percent. [XS094470722=TE]
To excite buyers, Nigeria would have to devalue or float the naira. Investors believe its overvaluation is delaying economic recovery especially as other oil exporters from Russia and Angola to Colombia have devalued their currencies significantly in the past 12 to 18 months.
The Nigerian currency hit a new low this week on the black market where a dollar fetched 318 naira, compared with the official rate of 197.
"The policy response in Nigeria has been very slow with respect to the currency," said Claudia Calich, head of emerging debt at M&G Investments in London. "If you look at Angola they have allowed the currency to devalue quite a bit so the rate of potential deterioration in Nigeria in future might be higher."