African countries have an outstanding $92.80 billion of Eurobond and they plan to return to the international debt market, taking advantage of investors’ voracious appetite for high yielding debt.
Nigeria has $11.20 billion in foreign debt and President Muhammadu Buhari is seeking National Assembly approval to sell additional $3.30 billion Eurobonds this year so as to provide external financing for 2020 budget and for debt refinancing.
While the total outstanding obligations ($11.20 billion) are 2.26 percent of GDP, there are concerns that the country’s dwindling revenue base may not be enough to absorb interest expense.
Analysts said the repayment plan has to be taken into consideration so as to avoid a downgrade.
New issuances could help Nigeria’s central bank shore up the external reserve that has been depleting in the last two years as authorities continue to defend the currency amid a current account deficit and dearth of inflow of foreign direct investment.
Early in this year, the reserves dropped to the lowest level since October 2017 (24-months), falling further by 1.4 percent or $539 million to $38.056 billion as at January 30 from $38.595 billion at the end of December 2019.
Foreign direct investments (FDI) into Africa’s biggest economy tanked after a 2014 collapse in global oil prices, coupled with an agitation in the Niger Delta region caused the country its biggest nightmare it had dreamt of in more than two decades.
Data from the National Bureau of Statistics show that investment into the country dropped 53.5 percent in 2015 to $9.8 billion from $20.7 billion in 2014. At the thick of the recession in 2016, the figure reached its lowest levels at $5.1 billion not until the country exited recession in 2017, that investors started building up interest into investing in the country. In 2017, foreign investment picked up at $12 billion and went further to $17 billion in 2018.
The devastating effect of the China coronavirus ravaging the global economy and sending crude oil to a low of $50 a barrel is forcing federal government to mull reviewing the budget benchmark.
Experts fret that the country may be overwhelmed by debt service costs as it uses nearly half of its budget to service debt.
S and P, one of the leading rating agencies in the world, has downgraded Nigeria from stable outlook to negative, siting slower than expected economic growth and the threat of coronaviruses on crude oil price.
The fear is that the negative rating signals a possibility of costlier debt round should the country proceed with the Eurobonds. Foreign investors could demand a higher yield on the back of higher risk rating due to this downgrade.
The International Monetary Fund has warned African governments that the rapid buildup of commercial debt makes them vulnerable to the whims of international investors now thirsty for returns in a world awash with negative yields. The continent raised a record $30 billion in Eurobonds in 2018.
The risk to these countries if they continue to borrow in United States dollar is how to pay back if oil price continues to fall as interest expense will be high, according to Wale Okunriboye, head of research at Sigma Pension Limited.
“We are coming from the crises of 1980s and 1990s. Zambia Eurobond has surged and their debt service is large compared to their reserve. Africa countries borrow in foreign currencies because they do not have an Eurobond market to fund themselves,” said Okunriboye.
Analysts are of the view that using borrowing isn’t a bad idea for a county plagued by infrastructure deficit and that president Muhammadu Buhari led administration has embarked on some capital project that will add impetus to economic growth.
The present administration is investing in construction, oil and gas and the power sector and it these projects are completed, the benefit to the real economy will be immense, according to analysts
Olusi said government need to borrow this money to help build railways and embark on project that will help lift millions of people out of poverty.
A study conducted by Mckinsey on Nigeria’s infrastructure requirement threw up the need for the investment of well over $31bn annually, over a 10-year period for the country to bridge her huge infrastructure deficit.
Over 50 percent of a population of 200 million people live below the poverty line of $1.98 a day while unemployment rate at 23 percent is one of the highest in the world.