The FGN is currently on a roadshow ahead of the planned issuance of Eurobonds to raise US$2.5bn. It has a reasonable story to tell, based upon the external balance sheet, in a market that is starting to turn but still has a healthy appetite for sovereign issuance from the frontier and emerging markets.
The roadshow has opened against the background of a sovereign credit downgrade by Moody’s from B1 to B2 with a stable outlook. This puts Moody’s on par with S&P (B, stable) and one notch below Fitch (B+, negative). We can quibble about the precise timing of the action and acknowledge the spirited riposte from the Debt Management Office (DMO) but can see why the agency acted.
Agencies have to perform balancing acts on occasions. In this case, Moody’s, while noting the accumulation of reserves, the pick-up in oil revenues and the return of the current account to surplus, has moved because the FGN has made limited progress in overcoming the dependence of the economy on oil revenues. While the DMO states that the FGN is committed to expanding non-oil revenues and cites several initiatives in progress, the agency flagged the slow pace of the improvement and the impact on the debt service burden.
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The DMO has just released data for September end, which reinforced the long-established picture of Nigeria’s federal debt outlook: a healthy ratio for stocks and a far worse position for debt service. FGN debt stocks of N17.2trn represent just 16.9% of 2016 GDP. In the case of Angola, another oil producer and also downgraded by Moody’s to B2 last month, the figure for just external debt in 2016 was 42%. Data from Fitch for the African oil exporters it covers have an average of 45% for total debt stocks, and 55% for South Africa. Even after making allowances for public but not strictly FGN obligations such as the local currency debt of state governments and the NNPC’s borrowings, Nigeria’s stock ratio is healthy.
Turning to the debt service burden and its fiscal impact, the story is poor. In the 2018 budget proposals, we understand that debt service is allocated N2.0trn, equivalent to 36% of FGN revenue. (The ratio will be higher/worse because of underperforming revenue collection.) In H1 2017 the burden was N927bn, of which 94% was paid on domestic debt. These metrics are clearly not sustainable.
This burden lies behind the DMO’s medium-term target of a 60/40 split between the FGN’s domestic and external obligations. At end-September, the split was 73/27. However, the National Assembly has approved the issuance of Eurobonds to raise a further US$2.5bn, hence the roadshow, and the proposal to refinance maturing longer tenor Treasury Bills (NTBs) into short-term external debt up to a ceiling of US$3.0bn. On the execution of these two approvals and allowing for continuing naira issuance at current levels, the split becomes closer to 65/35.
In Nigeria’s portfolio of external debt, the share of the total contracted at market rates will rise further after the current roadshow. The non-commercial share borrowed from multilateral and bilateral agencies was still 78% at the end of September however, and in Q3 2017 the external debt stock increased by US$300bn due to new concessional loans. Interest and fee payments over the quarter suggest an average annual interest rate of about 4% on the entire stock of FGN external debt. External borrowing from all sources brings the exchange-rate risk of course, but not always the risk of high servicing costs.
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Objections to the return to the Eurobond market have been raised. One such is based upon the risk from the normalization of US monetary policy. This process has already begun and is likely to continue at its steady pace now that the changes in the Federal Reserve have been announced by President Trump. We could point out that rates on the existing Nigerian sovereign Eurobonds are below their issue levels despite the start of normalization. However, we accept that the tide is turning yet are confident that the impact on sovereigns with reasonable external balance sheets is manageable.
Nigeria has this positive story to tell, along with the knowledge that offshore holdings of the FGN’s domestic debt, while rising happily from a very low base, are modest. This comfortable position is not shared by South Africa, Turkey and Brazil for example: or if we take the frontier universe, by Ghana, Zambia and Mozambique.
We also have to address a broader objection, not always spelt out in full that some sovereigns such as Nigeria, should cap their borrowing because the monies will be poorly deployed (or worse), and the development of the economy will go into reverse. The experience of the 1970s and the 1980s warrants this thinking. Yet the East Asian “miracles” of the 1990s were made possible by very heavy state borrowing to fund education and the transformation of infrastructure. There were other inputs which Nigeria was able to replicate such as entrepreneurship and domestic investment in manufacturing. If Nigeria is to migrate in developmental terms, it has to borrow heavily. The culture of paying tax will change slowly and non-oil revenues cannot fill the vacuum in a hurry.
Gregory Kronsten
