Ex­pen­sive do­mes­tic debt to stim­u­late foray into Nige­ria’s Eurobond

Business a.m. - - FINANCE & INVESTMENT - Sto­ries Afo­labi Oluwaseun

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.

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