Deficit financing: Is panda bond still on the cards?

The federal government’s strategy of resorting to external borrowing to fund budget deficit finds explanation in the increasing cost of servicing domestic debt. This disposition accounts for the growing quantum of foreign debts contracted on commercial terms in recent times with much emphasis placed on tapping the Eurobond market. According to data obtained from the Debt Management Office website, Nigeria’s external debt stock as at 30th September 2017 of about US$15.35 billion comprises US$9.90 billion from Multilateral sources (representing 64.49 per cent), US$2.15 billion Bilateral (or 14.02 per cent) and US$3.30 billion Commercial (chiefly Eurobonds) which translates to 21.49 per cent. These figures exclude the US$3 billion Eurobonds the country raised in November 2017.
In order to optimally diversify the country’s debt portfolio, especially against the backdrop of increasing difficulty faced by Nigeria in securing concessional loans from multilateral sources, other external funding sources should be explored with the overarching objective of securing the best deals that cut borrowing costs. One of such external funding window is the growing renminbi (RMB) market. Shortly before President Muhammadu Buhari’s historic visit to China “aimed at securing greater support from Beijing for the development of Nigeria’s infrastructure, especially in the power, roads, railways, aviation, water supply and housing sectors”, the Finance Minister , Kemi Adeosun, told the Financial Times and Reuters in an interview sometime ago that there was a ‘’possibility of issuing a Panda bond” to help finance the country’s budget deficit. By the way, a Panda bond is a renminbi-denominated bond from a non-Chinese issuer, sold in the People’s Republic of China. Since April 2016 when the Finance Minister made this disclosure even after hinting that the government could approach the RMB market in the third quarter of 2016, no Panda bonds have been issued which prompts the question: is the issuance of panda bonds still on the cards?
As a corollary to the long awaited Panda bonds, what has become of the widely reported currency swap-deal established between the Industrial and Commercial Bank of China (ICBC) and the Central Bank of Nigeria (CBN), on the sidelines of President Buhari’s visit to China in 2016? The deal was expected to boost trade between China and Nigeria as well as strengthen the naira by making it possible for Nigerian traders, who import mainly from China, conclude their transactions in the RMB (also known as the yuan) instead of the US dollar.
It is not for nothing that since the first two Panda bonds were issued in October 2005 by the International Finance Corporation and the Asian Development Bank, countries such as Poland, Hungary and South Korea have raised funds from the RMB market. In the opinion of JP Morgan, “issuing Panda bonds and then swapping into US dollars provides more attractive funding costs compared with issuing US dollar bonds directly”. So, access to cheap funds is the primary attraction of the RMB market. Only recently, the Canadian province of British Columbia made its second Panda bond issue of 1 billion yuan. The three-year Panda bond, which matures in November 2020, was priced at a coupon rate of 4.8 percent. The first offering raised 3 billion yuan on Jan 21 2016, with a three-year maturity, and a coupon rate as low as 2.98 percent. These low rates associated with Panda bonds make them more suitable than Eurobonds for the purpose of retiring domestic debts.

 

Indeed, the benefits of issuing Panda bonds for Nigeria are immense. Even the Finance Minister admits that it promises to be cost-effective. According to her, the priority was to borrow “the cheapest possible money as it seemed that a Panda bond would be cheaper than issuing a Eurobond’’ adding that “indicative pricing is a bit cheaper – about 1.5 per cent lower than the Eurobond’’. Issuing panda bonds will, no doubt, contribute to the strengthening of Nigeria-China economic relations. It will also serve to secure greater support from Beijing for the development of infrastructure, especially in the power, roads, railways, aviation, water supply and housing sectors. So, a country like Nigeria that is on the receiving end of China’s help in infrastructure build-up certainly has genuine financing requirement in RMB since the country can simply borrow in the Panda bond market to pay the Chinese contractors in yuan.
Moreover, Panda bonds issuance should be strongly considered in the context of the rapidly growing bilateral trade between China and Nigeria. According to a recent CBN report, ‘’business and trade relations between Nigeria and China have grown astronomically in the last decade with bilateral trade volumes rising from $2.8 billion in 2005 to US$14.9 billion in 2015. The Chinese Ambassador to Nigeria, Dr Zhou Pingjian corroborated this fact when he disclosed recently that the trade volume between China and Nigeria was in the region of US$13.8 billion in 2017. Without any doubt therefore, issuance of panda bonds will boost trade between China and Nigeria. The Chinese currency is already one of the top-10 most traded international currencies according to a recent report by the Bank for International Settlements. It is also expected to bolster Nigeria’s foreign exchange reserves via increase the stock of yuan. It will be recalled that Nigeria converted about one tenth of its reserves into yuan a few years ago.
Furthermore, diversified access to yuan, following the establishment of a benchmark yield, will make it easier for Nigerian banks and companies to deal with risks and boost their competitiveness. According to JP Morgan’s estimates, compared to dollar bonds, a typical corporate issuer with a BBB+ rating could reduce its financing cost by around 80 bps by issuing a Panda bond and swapping yuan proceeds into dollars.
Nigeria only accessed the Eurobond market for the first time in January 2011 after South Africa and Ghana had done so. The country should therefore take the lead in respect of the RMB market considering that Nigeria accounts for a significant proportion of the total trade volume between China and Africa according to the World Trade Organization. It goes without saying that for a government looking to diversify debt portfolio, other funding windows beyond Eurobonds should be considered. It is therefore time the plan to float Panda bonds, which appears shelved, is brought back to the discussion table.

 

Uche Uwaleke

Uche Uwaleke is the Head of Banking & Finance department at Nasarawa State University Keffi