Not near Uhuru: The $1bn FGN Eurobond issuance “success”

 The USD denominated Eurobond of $1billion issued by Nigeria in the first week of February 2017 was oversubscribed eight-fold and touted by many in government circles as evidence of the efficacy of the economic policies of the current government.

In determining the credibility or credit worthiness of the borrower (FGN), the first consideration for the Eurobond investors would be the source of the repayment of their interest and capital.  They know that a very high percentage of the foreign currency revenues (USD) of the FGN are from oil sales. These revenues have been boosted by recent rise and stability in oil prices. Coincidental to this is the relative peace in the Niger delta region which has made it possible for the country to produce close to 2.2 million b/d of oil. Based on these two factors, the FGN may be adjudged as a credible debtor for a USD denominated facility since repayment will be made directly from the oil revenues (petrodollars).

The claim of recovery and efficacy of the government’s economic policies need to be examined.

Clear, articulated and concise economic policies with very clear objectives, targets and outcomes based on the identification of the most pertinent challenges in the economy is the starting point of an economic recovery plan. The present administration has promised to present an economic blueprint to Nigerians in the month of February 2017, which is a clear 20 months after it took power. Since we do not have access to this blueprint yet, we may not be able to determine whether it is working or not.

Exchange rate stability is a key element in any stable and growing economy. In the last 20 months, we have seen the naira slide from N197/$ to 500/$ in the parallel market, which is regarded as the “real market” by a number of analysts (It is the market where a willing buyer and willing seller exchange currencies freely). The tightly controlled official market has witnessed a fall from N197/$ to N305/$. Moreso, the policies surrounding the Fx market have been hazy and inconsistent with supplies from foreign direct investment and foreign portfolio investments seriously constricted.

Benchmark Inflation which was in single digits, has shot up close to 20% in the last 20 months. Food prices and other consumables have skyrocketed considerably. Raw materials have become very expensive considering that a lot of raw materials in most industries are imported. This has led to imported inflation in goods and consumables.

Unemployment has not abated in the last 20 months. At the end of Q2 2015 unemployment rate was 8.9% and by Q4 2016 unemployment had shot up to 13.3%. This is does not take into account under employment or partial employment. Moving around Lagos at any time, one would see that there are more beggars on the streets than ever before.

The capital markets are the barometer of the economy. The equities market and the fixed income markets have not fared better in the last 20 months. Nigeria was removed from the JP Morgan emerging markets bond index and placed on a “stand alone” by the MSCI emerging equities markets index. 2016 witnessed capital flight from the equities market (NSE) and the fixed income market (FMDQ). Foreign portfolio investment decreased from $5.95billion in 2015 to $1.81billion in 2016 mirroring total capital importation which reduced from $9.1billion in 2015 to $5.1billion in 2016. The effect of the above is that market confidence has reduced to its lowest ebb in the equities market while cost of government borrowing has gone really close to 20%.

Without mentioning challenges in the educational sector, health care and other sectors of the economy which contribute to the growth and well-being of citizens and the economy, we can see that the fortunes of the Nigerian economy has gone from a bad situation to a precarious one in the last 20 months.

For those who believe that the success of the $1billion Eurobond issue is evidence of success of economic policy, I would like to ask them which sets of policies exactly has led to the supposed success? If the issue were a naira denominated bond, with the conditions we have seen in the local capital markets, would we have achieved the same level of participation of international investors as we saw in the dollar denominated the Eurobond? Anyone or government who has the same level of cash flows from oil revenues in a stable price regime would be able to borrow $1billion in the international debt markets.

The celebration of this “success” is confused. The task before the government is more serious and challenging than for government officials to spend valuable time propagating an inconsequential feat as raising $1billion as evidence of positive performance.  Both the monetary authorities and fiscal authorities should focus on coordinated policies which will reflate and kick-start the economy. The charge to them is to spend their precious time on seeking lasting solutions, laying a foundation for a vibrant economy and to look inwards for real solutions to the current economic challenges.

 

Olutoyin Ayoade, Managing Director, MBC Securities Ltd (Member of the Nigerian Stock Exchange), [email protected]