The Economist Intelligence Unit, EIU says Nigeria tapped the international debt market last week for a Eurobond sale of over one billion dollars with yields at 8.5% to pay for urgent petrol supplies after a debilitating shortage following the importation of bad fuel into the country in January.
In a note sent to investors globally at the weekend, the EIU said while Nigeria’s success in raising the $1.25bn without much fuss could mean that the investors took the view that the country’s debt situation remains manageable, that the money will go into paying for petrol will unsettle bond holders.
Nigeria is a leading crude oil producer and its controversial programme of importing refined petroleum products had been predicated on exchanging crude oil for petrol. Questions are now being asked as to why Nigeria must pay cash for petrol this time.
According to the EIU, “a few days before the issue, Zainab Ahmed, Nigeria’s finance, budget and national planning minister, said that Nigeria will use as much as US$2.2bn from the previous Eurobond sale to pay for Nigeria’s spiralling subsidy bill.
“Using more than half the proceeds from the previous Eurobond to fund the fuel subsidy is a misappropriation of sorts. Before the issue in 2021 there were claims that most of the funds would go towards capital expenditure.
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“Ms Ahmed continues to emphasise that much of the fuel subsidy will be funded from local borrowing, which was the original plan, but the magnitude of the subsidy bill has evidently made this impossible. Since Russia invaded Ukraine global oil prices have surged, averaging over US$100/barrel.
“For Nigeria’s public finances, this presents more of a problem than a relief: although the federal government gets about one-half of its receipts from crude sales, production has been dismal—Nigeria was overcomplying with its output quota by 413% in February.
“Meanwhile, Nigeria’s petrol requirement is large and growing, together with the costs of delivering the subsidy. The government had announced earlier this year that petrol prices would remain regulated until mid-2023. As an election is due in February 2023, a backtrack on the policy is politically unpalatable meanwhile.”
The report said “demand for the issuance brought the yield to below an initial guidance of 8.75%, to 8.5%. A US$4bn issue in 2021, which included a US$1.25bn seven-year tranche, was priced at 6.125%, and the premium in the latest sale probably reflects low crude production, high inflation and a surging budget deficit.
“Nigeria’s ability to tap the international capital market means that the country passed an important test of investor demand for emerging-market debt at a time of heightened global uncertainty following the outbreak of the Russian-Ukrainian conflict.
“The authorities could borrow more than N3trn (US$7.3bn) domestically in 2022, although the latest Eurobond and proceeds from the 2021 issue will go some way to reducing off-budget central bank financing (deficit monetisation) through an overdraft facility.
“At least N15.5trn (8.5% of GDP) is outstanding. Financing through the central bank carries negative consequences for the wider economy—notably a high cash-reserve requirement for commercial banks (crowding out the private sector) and elevated inflation. “
The analysts at EIU say they “now expect a wider fiscal deficit, of 5.5% of GDP. Nigeria’s ability to tap the bond market means that financing should be manageable, but increasingly expensive debt is being taken on to finance expenditure that does not bring higher productivity. Eventually (we expect after the election) Nigeria is going to have to make adjustments.”
