Rapid deterioration in Nigeria’s debt metrics

Monetary tightening in the US and elsewhere has fuelled rigorous and not-so-rigorous analysis of the indebtedness of governments across the world. There have been a small number of sovereign defaults on external debt such as Mozambique, Sri Lanka and Zambia, and many more warnings of debt distress from multilateral bodies and ratings agencies. Nigeria does not currently feature in this second group, its case showing a positive story on the total debt stock and a highly negative story on the service of its debt.

The waters have been muddied by the reported claim by the federal finance minister, subsequently denied by her last Wednesday, that the Federal Government is to discuss debt restructuring with the World Bank and the IMF. Both multilaterals are adamant there has been no such approach. We assume at this point that the minister either “misspoke” or has been misrepresented.

The Debt Management Office (DMO) notes in its sustainability exercise for 2021 that total public debt is at a “moderate” level, projected at 26 percent of GDP in both this year and next. This leaves Nigeria comfortably below various ceilings: 40 percent (its own), 55 percent (World Bank and IMF), and 70 percent (Ecowas). The ratio compares well with peer economies such as 68 per cent for Kenya.

More importantly the DMO insisted in the sustainability exercise, the ratio would remain below 40 percent once guaranteed loans and the FGN’s ways and means advances from the CBN are included. The exercise was released in July but based on end-2021 data, since which point the advances have continued to mount.

When the DMO proposed their conversion into 30-year notes issued by the CBN (and therefore their inclusion in public debt data) in Q1 ’21, the total was N10trn (or a little under 6 percent of last year’s GDP). The rapid rise in the servicing costs for the advances is a cause for deep concern: N339bn in 2019, N913bn in 2020 and N1.22trn in 2021. We understand that the interest expense on the advances is the monetary policy rate (currently 15.50 percent) plus 300bps, and that the drawings permitted are capped at 10 percent of the previous year’s revenue.

While we wait for the application of transparency in the form of securitization, we recall the pledge of the federal finance minister and the CBN governor to the IMF that the advances would be discontinued by 2025.

Since a return to the Eurobond market is unlikely amid tightening by the Federal Reserve that has further to run, access to the advances to help cover the soaring FGN deficit has obvious merits. The FGN raised $1.25bn from the market in March. It indicated last year that it would tap its issues in 2021 for a further $2.2bn but is understandably holding back.

Read also: No plans to restructure Nigeria’s debt – Minister

The weak point in the DMO’s sustainability exercise is the debt service to revenue ratio, which it termed “high”.

Delivering the 2023 FGN budget to the National Assembly on October 7, President Muhammadu Buhari acknowledged that the ratio merited close attention. These are two classic examples of understatement, which paper over the reality that Nigeria’s ratio of revenue to GDP is among the poorest in the world.

The African Statistical Yearbook 2021, produced by the African Development Bank, shows Nigeria’s ratio for interest payments to total revenue and grants at 93 percent in 2020.

Among peer economies on the continent with which investors and ratings agencies like to draw parallels, we see from the same source that the ratios were 50 percent for Ghana, 48 percent for Egypt, 24 percent for Kenya and 14 percent for South Africa. When we add capital spending to the mix, Nigeria’s ratio comes close to 140 percent. It becomes obvious that FGN borrowings and deficits are soaring, and that its debt metrics are fast deteriorating.

The 2023 budget does not inspire confidence in this context. It projects total debt service of N6.2trn excluding sinking fund payments, which amounts to 67 percent of forecast revenue. However, revenue collection was less than two-thirds of budget in January-July 2022, and we expect the underperformance to continue.

The shortfall is largely due to oil revenue, for which plummeting crude production is to blame. The new budget has a familiar gung-ho assumption for average production including condensates of 1.69 million barrels per day (mbpd): production without condensates is running at +/- 1.0mbpd. The best that can be said is that it is balanced by the FGN’s traditional conservative price assumption (of $70/b for 2023).

We have seen this combination for the many years that we have been covering Nigerian fiscal policy. Another tradition is that the assembly queries the oil assumptions, leading to a compromise that releases more funds for spending. It is likely to be upheld as we approach elections in February.

Nigeria is not seen as debt distressed because it secured extensive debt relief from the Paris Club in 2005 and the London Club in 2007. The write-off left the FGN with enviable indicators for external and total debt.

Six years later, public external debt was still well below $10bn and overwhelmingly concessional but had reached $40.1bn by June this year. The FGN is rapidly losing the benefit of the relief and would be unwise to count always on a robust bid from domestic institutions for naira-denominated bonds: the outcome at this month’s auction by the DMO was a disappointment.