Nigeria is engaging with banks to securitise five years of dividends from the Nigerian LNG Limited (NLNG) to raise some seven billion dollars to ease the country’s acute foreign exchange shortage.
The government’s latest attempt to lure dollars into the FX-starved economy may however not happen as quickly as the government expects, according to foreign bankers and investors who say there are still some considerable hurdles to overcome.
BusinessDay learnt that while the prospects of the deal happening are good, there is not a chance of Nigeria securing the dollars in less than four to five weeks at the least.
In addition, the specific terms for the deal being pushed by Standard Chartered are yet to be agreed and signed off on, according to a source familiar with the deal.
The deal essentially means that dividend payments that will accrue to Nigeria from its 49 percent equity in NLNG over five years could be sourced and handed to the country by the bank, which then expects to be paid a fee for the transaction, with the government also covering the interest payments for the period.
It is unclear how the federal government will fund its huge obligations in the five years if it has already taken out its lucrative NLNG dividend payments that often account for a significant portion of government revenues annually.
“Isn’t this mortgaging future revenues to fill today’s gap?” Charles Robertson, head of macro strategy at FIM Partners, an asset management firm, asked about the plan.
“It feels like Nigeria is sacrificing export earnings in coming years – which will also be needed then,” Robertson told BusinessDay.
The government does not seem to have the answer to how it will survive the five years when it will receive no NLNG dividend.
“The question with this plan as always is that when questions are asked of how the government will cope for five years without NLNG dividend payments, you do not get a good answer,” a former senior official who left government service in May said.
Dividend from NLNG is forecast to total N749 billion in the four years between 2023 and 2026, according to the government’s projections.
In the seven years between 2015 and 2021, the company paid out $5.3 billion in dividends to the government, according to data obtained from its books.
“It may take 10 years for the company to pay the government $7 billion in dividends with the current reality,” an investment banker familiar with the deal said. “There are issues that need fixing first, trains 1 to 6 currently operate at roughly half their potential capacity, a situation that has persisted for some time.”
An analysis of the $5.28 billion NLNG dividend that was remitted to the federal government through the Nigerian National Petroleum Company (NNPC) between 2015 and 2021 showed that dividend from the gas company has fluctuated and is yet to eclipse 2015’s record payout of $1.04 billion, the highest in the review period.
In 2016, the dividend slumped to a low of $356.13 million in the thick of the collapse in oil and gas prices, before it recovered to $798.14 million in 2017 and $904.5 million in 2018.
In 2019, 2020 and 2021, the federal government received $915.65 million, $545.13 million and $722.44 million respectively as NLNG dividends, with the COVID-19 pandemic in 2020 providing another major shock.
The naira gained after news of the dividend securitisation deal was reported on Friday.
The embattled currency appreciated against the dollar on both the official market and the streets. The naira jumped 5.7 percent on Friday, closing at 789.94/$ in official trading compared to the previous day’s rate of N837.49/$.
The naira also appreciated 8.39 percent to 1,200/$ on the streets Friday, paring losses from the day before when it fell as low as 1,310/$.
Liquidity in the official market also improved on the day. Data from the official Nigerian Autonomous Foreign Exchange Market window revealed that the FX turnover for the day reached $259.84 million, marking a 129.50 percent increase compared to the previous day.
The government’s desperation to grease the illiquid FX market at a time when petrodollars have dried up and foreign investor confidence is weak has necessitated the move to securitise a significant chunk of its future dollar cash flow in the hope of clearing a yawning dollar demand backlog that has swelled since 2020.
“Is securitisation of a future cash flow to fund expenses a good strategy?” a senior banker asked.
“Is it not possible, prudent even to invest such borrowings – which is what they are – on productive assets especially exports or import substitution industry? How much would it cost to kickstart a mining revolution here, borrowing a leaf from Jokko Widodo in Indonesia?” the banker added.
Some Nigerians are also worried about the impact of the dividend securitisation on the country’s already burgeoning loan portfolio, as the arrangement would mean spending today money that would be earned over the next few years.
“In simple terms, the expected cash flows from NLNG dividends would be charged and sold as ‘asset backed’ securities. It would add to the country’s burgeoning loan stock,” another senior banker said.
The government may not worry much about the addition to its debt stock, given that the dollar demand backlog it intends to settle with the cash raised from securitising its NLNG dividend is already debt owed to Nigerian companies and financial institutions who used their cash to back letters of credit used to ship in goods that have already been consumed.
“So we are merely reclassifying the debt from past due obligations to securities,” a source familiar with the government’s plan said.
“Unless someone has a better idea of how to raise $7 billion without doubling crude production or selling assets, the options will have to be debt. It is just not new debt; they are house-cleaning in the hope that we will begin to see private capital flows once the deck is clear,” the source said.
An oil-for-dollars scheme for NNPC, the state oil company, to receive $3 billion from African Export-Import Bank (Afreximbank), was announced in August but the deal has not materialised and it is unlikely to happen soon, according to multiple sources familiar with the matter.
Under the arrangement, Afreximbank is charged with pulling the fund from banks and oil traders, but the process of securing investor interest is taking much longer than the short time the government had announced.
“I was in the room at the United Nations General Assembly when the group managing director of NNPC said that the first tranche of $1 billion will flow in by October; now we know he was just being over ambitious to say the least,” one senior foreign banker said.
“Deals like this never come together in such a short time and given Nigeria and NNPC’s history as well as the tough global market conditions today, Nigeria is going to have to recalibrate when it comes to timing,” the banker added.
Another banker said the deal was “doable” and that “the question is pricing and terms”, adding: “I hear the Afrexim loan is at 14 percent and it is secured.”
One CEO of a leading conglomerate who spoke to BusinessDay said while it is desirable of the government to be pushing for significant foreign exchange to come in quickly, it needs to be realistic and must manage the issue of trust well.
“The situation is getting dire. Today, you cannot open a letter of credit unless you are cash-backed and if this were to continue in two months, you will start to see shelves drying up in the markets around the country,” he said.
Sources of FX remain elusive for Nigeria. The country’s largest source of dollars is oil exports but it is producing less than its daily OPEC quota of 1.8 million barrels a day.
Wale Edun, the finance minister, said earlier last week that the government had a “line of sight” on $10 billion of inflows into Nigeria in the coming weeks but provided no further details.
Many businesses have money stuck in Nigeria. Nigeria tops the list of countries with trapped airline funds, according to a June report by the International Air Transport Association, with the west African nation accounting for $812.2 million of the $2.27 billion trapped globally.
“Nigeria is a country in dire need of foreign exchange,” says Wilson Erumebor, a senior economist at the Nigerian Economic Summit Group, a policy think-tank. “The policymakers need a clear-cut policy direction to attract forex into the economy.”