Expensive domestic debt to stimulate foray into Nigeria’s Eurobond

NIGERIA’S MACRO LAND SCAPE is currently less appealing from an investor’s perspective compared to the beginning of the year.

With foreign investors sell-offs seen in debt and equity markets, analysts believe that expensive domestic debt will drive more interest in Nigeria’s Eurobond.

Just recently, the Senate approved Buhari’s proposal to issue $2.8 billion worth of foreign currency denominated paper to help finance the 2018 budget. Given the continued monetary policy tightening in the US, which has pushed long-term interest rates 69 basis points higher year-to-date and trade war concerns that have both raised bond yields across some region, it is expected that relatively expensive pricing is on the card.

Mustapha Wahab, an analyst at Cordros Capital, suggested that the rising U.S yields would stimulate investors’ interest for higher yield in the country.

Wahab said, “I believe the combined impact of a weaker domestic picture and rising U.S yield will fuel investors’ thirst for higher yield. In any case, we look for a yield of sub 10 percent levels.”

“Fundamentally, the fiscal authorities need to address Nigeria’s revenue challenges. Ordinarily, approaching the debt market to finance its budget deficit could lead to a spike in the yield curve, which has the potential to sabotage federal government’s effort to cut down borrowing cost and there is a risk of crowding out the private sector.

“I believe that the trend of capital expenditure underimplementation will persist on revenue shortages and in spite of the growing concern around debt sustainability; I do not see a full-blown crisis at least, in the near term as the benefits outweigh the cost,” the Cordros Capital analyst said.

Over the past few months, the IMF has relentlessly stressed the need for Nigeria to cut down on its excessive borrowing as the country’s debt profile continues to raise concerns.

Notably, at the end of H1 2018, Nigeria’s debt stood at $73.2 billion, with a foreign debt of $22.4 billion accounting for 30 percent of the total. A closer analysis shows that it is quite alarming that the foreign and domestic borrowings have grown by 44 percent and 21 percent compound annual growths respectively between 2011 and H1 2018.

In terms of debt serviceto-revenue ratio, as at FY 2017, domestic total debt service amounted to N1.82 trillion, equating to 69 percent of total retained revenue. This explains the DMO’s view that the federal government still has little more room for additional borrowing most especially from abroad,

Speaking on the debt profile of the country, said that since Nigeria’s debt profile is largely denominated in local currency, possible currency depreciation would not drive servicing cost higher, adding that, there is a need for the government to substitute expensive domestic borrowing for cheaper foreign loans.

Wahab said, “We are less concerned about domestic debt as Nigeria’s debt profile is largely denominated in local currency, hence, we do not think possible currency depreciation could drive servicing cost higher. Instructively, of the total amount earmarked to service debt in 2017, only 9.9 percent of the total was channeled into servicing foreign debt obligations, hence the need to substitute expensive domestic borrowing for cheaper foreign loans. More importantly, as a percentage of Nigeria’s foreign currency earnings, external debt service only sipped 6.2 percent in 2017.”

He further explained that the foreign debt service ratio to domestic debt is exceptionally low, because 60 percent of the foreign debt stock as at H1-18 is in the form of concessionary non-Eurobond debt, while the balance is commercially priced international borrowings.

“I think foreign borrowing, at this time, will serve as a buffer to the depleting foreign reserves following the recent foreign sell-offs of naira assets. Though inorganic in nature, we believe an inflow of $2.8 billion, will give the CBN extra legroom to boost dollar supply across all segments, and thus, keep the naira relatively rangebound,” he said.