Low debt to help Nigeria battle looming recession

NIGERIA is facing a recession, a plunging currency, inflation at a decade-high and a widening budget deficit. It has one thing going for it: low debt.

That means the nation has room to tap international markets as it plans to spend its way out of an economic slump, according to analysts, including Manji Cheto, at Teneo Intelligence. Nigeria said on August 8 that it was seeking banks to manage a eurobond sale of as much as $1 billion (R13bn), its first foray into the market since 2013.

“If you look at Nigeria’s debt profile, the additional external debt is not likely to have any material negative impact,” said Cheto, the senior vice-president at Teneo. “One thing is clear, however, the yield is likely to be higher than Nigeria’s last eurobond sale in 2013, given that the macroeconomic fundamentals have deteriorated.”

Yields on the country’s $500 million of bonds due July 2023 fell 1 basis point to 6.64 percent yesterday. The yield is down 204 basis points this year. Nigeria’s dollardenominated bonds have returned 1.9 percent this quarter, compared with the 4.7 percent average return of dollar debt in sub-Saharan Africa, according to data compiled by Bloomberg.

President Muhammadu Buhari approved a record 6.1 trillion naira (R252.3bn) spending plan this year after Nigeria’s economy contracted in the first quarter as revenue fell because of lower oil prices and a decline in output. The country’s ratio of debt to gross domestic product (GDP), at 13.2 percent, is the lowest in sub-Saharan Africa and about a third of the average of 37.2 percent, according to the International Monetary Fund (IMF).

Nigeria plans to borrow as much as $4.5bn in the bond market through 2018, according to its Debt Management Office, as capital spending rises to about 1.75 trillion naira, more than four times the amount last year. The money will be spent on roads, railways, ports and electricity generation to support diversification of the oil-dependent economy into agriculture and solid-minerals development.

After shrinking 0.4 percent in the first quarter, the economy is set to contract 1.8 percent this year as shortages of power and foreign currency curb output, according to the IMF. The Central Bank of Nigeria increased interest rates by 3 percentage points this year to 14 percent as inflation reached 16.5 percent in June.

The currency has slumped 38 percent against the dollar since the central bank allowed it to trade freely in the interbank market on June 20, removing a currency peg that had deterred foreign investment and squeezed importers.

The government had also approached the World Bank and export credit agencies to borrow at concessionary terms in addition to commercial loans to help finance a budget gap of 2.2 trillion naira, Finance Minister Kemi Adeosun said this week in Abuja.

“Nigeria’s debt profile is one of the most favourable ones in Africa and investors appreciate that,” Stuart Culverhouse, the chief economist at Exotix Partners, said this week. – Bloomberg