‘Nigeria Can Borrow More as External Debt is Still Negligible’
Citing the latest report of the Debt Management Office, which put Nigeria’s debt at $10.72 billion, representing 2.1 per cent of estimated 2015 gross domestic product (GDP), FBNQuest has said the nation’s external debt is still insignificant.
According to a note from FBNQuest Ltd, an investment banking arm of First Bank Limited, even when the projected external borrowings in the 2016 appropriation bill are factored into the existing debt figures, the economy would be in a comfortable position and be able to borrow more.
“The latest report from the DMO shows FGN external debt at US$10.72billion at end-December, equivalent to 2.1 per cent of estimated 2015 GDP. (When we add its domestic debt, we arrive at a burden representing 11.0 per cent of GDP.
The projected net external borrowing in the FGN’s 2016 budget proposals of US$4.5bn would increase the stock by 0.9 per cent of GDP.
“The preliminary conversations with the World Bank and the African Development Bank on budget support totaling US$3.5billion could add a further 0.7 per cent.
These loans are favoured by the FGN for their low cost and the close relationships with the lenders. Only the existing Eurobonds in the chart were contracted at market rates,” it posited.
Further justifying Nigeria’s level of comfort in terms of external debt, FBNQuest pointed out that of the total federal government’s external debt stock, 86 per cent is concessional.
This, it noted, “reflects the debt relief enjoyed by Nigeria in the mid-2000s.” It also noted that, “its bilateral and multilateral partners are in no hurry to adjust their terms in the light of its lowermiddle income status.”
Concessionary loans are loans with no interest or a rate of interest that is below the average cost.
They are mostly World Bank loans under IDA terms. IDA loans have a zero and repayment stretched over 25 to 38 years with five- to 10-year grace period.
Besides, it added, the state governments’ share of the debt amounts to $3.37billion, and is included because it is guaranteed by the FGN.
The investment bank noted at Nigeria’s current debt level, “the FG is still likely to favour a new Eurobond issue, whatever the size, to flag a strong credit story under temporary fiscal pressure.”
“The oil price shock has closed pricing differentials for the FGN. Eurobond issuance in the middle of the curve would probably be priced at around 950bps based on current yields, and so more than 250 bps below FGN bonds of similar tenor.
The differential has narrowed by about 200bps in the past year. Although the FGN is said to have put the Eurobond issuance on the back burner, we believe this is temporary.”
The Federal Government has proposed a deficit of N2.2 trillion in the 2016 budget, which is equivalent to 2.16 per cent of GDP.
The deficit is planned to be financed by a combination of domestic borrowing of N984 billion and foreign borrowing of N900 billion totaling N1.84 trillion.
Already, World Bank has offered Nigeria $3.5 billion to support the implementation of the 2016 budget while the AfDB announced a $1 billion ‘budget support loan’ for the country, as response to the request by the federal government. Besides, the country is also seeking a Chinese loan of $2 billion.
There were reports that the Minister of Finance, Kemi Adeosun, will visit China this week to negotiate the loan, which is being sought to finance government’s aspiration in the 2016 budget.
A federal government official was said to have revealed that “the finance minister, in the company of the Central Bank Governor Godwin Emefiele, is scheduled to be in China sometime next week to conclude negotiations on the $2 billion loan.”