Nigeria faces an uphill task finding creditors to plug an N11 trillion hole in the proposed 2023 budget amid foreign investor apathy for the country’s debt instruments and rising domestic interest rates.
The yield on Nigeria’s latest $1.25 billion Eurobond has jumped by more than 500 basis points to 13.695 percent as at September 23, from a yield of 8.375 percent when it was first issued in March. The $1.25bn Eurobond is now trading at a discount of 43.95 percent, the most since July.
This development automatically raises the cost of issuing a fresh Eurobond as the government will have to pay no less than 14 percent at a time when its dollar earnings are constrained due to oil theft that has crimped petrodollars.
Emerging-market Eurobonds, including Nigeria’s, are being battered by the relentless hike in global interest rates which has triggered capital flight to developed markets.
Back home, the Central Bank of Nigeria (CBN) has also raised the benchmark interest rate to a record high of 15.5 percent and that means the federal government will have to pay more to local investors to borrow money from them.
Analysts say the implication of Nigeria’s rising Eurobond yields and the CBN’s aggressive interest rate hikes is that the federal government will be unable to raise the earmarked debt in next year’s proposed budget without paying over the top and deeply straining its already precarious finances.
“Finding creditors to fund the proposed 2023 budget will be tough, except the government is ready to pay the premium the market demands,” a source familiar with the matter said.
“We are effectively shut out of the international debt market, and the local debt market may not offer much of a relief with the liquify squeeze in the market,” the source said.
Finance Minister Zainab Ahmed said the proposed 2023 budget deficit may well rise to N12.41 trillion, if the government continues to subsidise petrol beyond June 2023 as guided by the current government. If that happens, then the government would need to borrow even more with revenues expected to total N8.46 trillion, less than half of the proposed expenditure of N19.76 trillion.
Ahmed however also hinted at the sale of some national assets to raise sufficient cash to implement the budget.
“That’s an area we should explore; we have simply not done enough to open up to private capital, instead we have gone for the less stringent option of debt,” said Ayodeji Ebo, managing director at Optimus by Afrinvest.
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“Egypt plans to raise a record amount from the sale of national assets; why can’t Nigeria be as ambitious, especially now that the debt window is shutting down?” Ebo said.
Egypt last month announced plans to raise $6 billion from the sale of government assets as it seeks to attract more Foreign Direct Investment (FDI).
The numbers show it should be Nigeria that should be more desperate to raise FDI rather than Egypt, which topped the chart of African countries attracting the most FDI for the fifth straight year in 2021.
In 2021, Nigeria’s FDI fell to a record low of $698.8 million, according to data by the National Bureau of Statistics. Egypt, on the other hand, attracted $5.1 billion.
Nigeria has several redundant government assets crying for the injection of private capital, whether it is with power transmission or railways.
Why are Nigerian Eurobonds selling-off?
Olaolu Boboye, an analyst at Lagos-based CardinalStone, said the sell-off in Nigerian Eurobonds is not entirely new, as the unabated global inflation and hawkish stance from the US Fed and other global monetary authorities have intensified risk-off sentiment from emerging and frontier markets.
“Fears of a global recession have become more pronounced, as the hawkish rendition of global central banks is impairing the post covid recovery, and Nigeria has not taken advantage of the elevated crude oil price, owing to crude oil production constraints, which fell to a historic low,” Boboye said.
Due to oil theft, and pipeline vandalism, Nigeria has been unable to reap the benefits of high oil prices, with oil revenues coming in 61 percent below target during the period. That’s despite crude oil trading at a high not seen in years.
Nigeria’s crude oil production slumped below one million barrels per day in August 2022, the lowest in at least 30 months.
Lower oil production despite high crude oil prices has slashed dollar inflows needed to boost the reserves. Data from the CBN revealed that external reserves dropped to $38.36 billion on September 27, 2022, from $40.15 billion on January 4, 2022.
