Nigeria eyes $30bn from debut forex bond

…Good move, but debt concerns remain – Experts

Nigeria could raise up to $30 billion from its maiden foreign currency-denominated bond issuance planned for June, authorities knowledgeable about the process have indicated.

The $30 billion is about the estimated size of dollar assets within the country’s local banking industry.

Authorities say that the sovereign domestic foreign currency issuance aligns with moves to attract more forex inflows to stabilise the naira, which had suffered immensely from dollar shortages.

In a telephone interview with BusinessDay, Patience Oniha, the director general, Debt Management Office (DMO) confirmed earlier statements by Wale Edun, minister of finance and coordinating minister for the economy, that the debut forex bond is being planned for the second quarter of 2024, but said it will be a short to medium-term instrument.

She said the transaction advisers were yet to be appointed, but were being banked on for proper projections on what could come in.

“It’s when we appoint the advisers that we can probably do a projection,” Oniha said.

“But the assumption is that there are many Nigerians holding dollars in their domiciliary accounts, and not just individuals but institutions including banks themselves and Nigerians in diaspora as well.

“So it’s a way of bringing dollar liquidity into the system; the federal government of Nigeria (FGN) will get needed dollar liquidity. The target investors are individual Nigerians, the institutions, and if Nigerians in the diaspora want to invest, they can as well,” she added.

Like the debut eurobond issuance in 2011, the maiden forex bond is expected to open up local issuance of similar bonds by companies and sub-nationals, a plan already given provisional approval by the country’s apex capital market regulator.

According to Oniha, “The difference between the foreign currency bond and the Eurobond is that it will be issued locally and not offshore.

“It’s like issuing FGN bonds in foreign currency – and not likely that the government will be using the primary dealer market but will issue foreign currency bonds in the local market.”

She confirmed that the Know Your Customer (KYC) principles will be strictly adhered to, considering the nature of the deal. This is also to ensure compliance with the laws.

“The KYC will ensure that Nigeria aligns with FATF and certain conventions that the country had signed on to. You also know there is already a prohibition; if you deposit cash in your domiciliary account, you can’t transfer it.

“We want to guard against a situation where people go to the black market and buy dollars to invest in these bonds, and then distort the market that government is working so hard to statbilise.”

The transaction advisers, when appointed, will also work out appropriate pricing, however, it will be attractive enough to lure prospective investors.

She said: “This may be benchmarked to appropriate assets but this and the tenor would be determined in conjunction with the advisers. We have to offer them something around the eurobond or any other eligible foreign currency instrument. We’ll also look at US treasuries.

“Those are the two references we have said we’ll use because retail investors are not getting eurobond rates, but you still want them to invest; so it has to be attractive.

“These are our thought strategy for now. When we get the advisers, they may have a review and appropriate decisions taken, but the intention is not to offer eurobond rate in the local market.”

The director general further confirmed that when mature, the bond will be repaired in the same currency it was issued.

While she erased concerns around debt, she noted that the planned deal is already captured in the approved budget as part of 2024 borrowing.

She equally debunked earlier rumours that the government was planning to convert people’s domiciliary accounts in local banks into naira, and called such “false assumptions which emanated when this product was being designed”.

She also clarified that the pension fund administrators can invest in the bond if their guidelines allow them. “Some PFAs actually invest in our eurobonds, so there is no difference.”

Johnson Chukwu, CEO of Cowry Asset Management Limited, has called the planned deal a good move, but expressed worry about the utilisation of proceeds and possible debt concerns.

“We need foreign currency liquidity to meet maturing obligations. Most of these instruments are short-dated and some of them will be maturing in a few months. Upon maturity, we need liquidity to fund their repayments and given that our crude oil production is actually not improving, this will be the surest way to avoid a default,” he said.

Chukwu is also of the view that the government could get any amount being projected but certainly will come at a very huge cost.

He said: “I wouldn’t know what government projections are in terms of yield, but I can say it will be market-determined. When they come to the market, and the offer opens, the investors are going to dictate the kind of minimum yield they expect.

“I think investors are going to price in the risk of default. For instance, Ghana has defaulted; I think Ethiopia has too. So investors will price in the risk of default and they will charge an appropriate premium for that.”

Chukwu highlighted how the deal could impact the country’s debt service obligation as well as overall debt, which has reached N97 trillion.

He said: “Last year, total local currency debt service was about N4.4 trillion; foreign currency was $3.5 billion. If you even use an average rate of N1,200, you are talking about N4.2 trillion. So if you add both, you are talking about N8.6 trillion as debt service last year.

“If, for instance, the government borrows $10 billion now, at a minimum of 10 percent, you will expect another debt service of $1 billion (about N1 trillion). And if you add that to the N8.6 trillion, you’re already at N9.6 trillion and then you have to juxtapose that against our revenue.

“With this, we are running into a situation where the debt service is going to be a big burden to us. And that debt service of N10 trillion excludes the additional debt service that will come from additional borrowings expected this year.

“Remember that we have borrowed about N12.7 trillion already this year, at an average of 20 percent; that is about N2.5 trillion debt service and when you add this to N9.6 trillion, that will give you about N12 trillion debt service, which clearly is higher than the N8.25 trillion in this year’s budget.

“The budget this year doesn’t have a debt service projection of N12 trillion. So the concern is what would be federal government revenue at that point. If you are not careful, you’ll achieve a debt service to revenue of about more than 100 percent.”

Reacting to whether the intended gains could be overweighted by losses Chukwu noted:: “It’s all about where you put the money – N12.7 trillion has been borrowed, where was it invested in? The N22.7 trillion ways and means, where was it invested in? If you invest the proceeds in income earning assets that are giving you returns higher than the cost of funds borrowed, then you are good.

“But if it’s basically just to prepare to pay back liabilities, it’s not sustainable, and will be depleting our scarce resources.”