FG’s debt management strategy and pessimists’ viewpoint

FG’s debt management strategy and pessimists’ viewpoint

There is a misconception regarding the proposal by the Federal Government to raise external financing to the tune of $5.5 billion. The danger of that mind-set is that it is beclouding the excellent job the Federal Ministry of Finance and the Debt Management Office (DMO) are doing to manage the nation’s debt profile to support growth. It is important to first of all, understand the government’s motive in seeking to borrow from external sources, the request for which is before the National Assembly. It is true that the government is presently seeking the approval of the legislature to raise that sum from external sources. It is also true that it is well-advised given the economic circumstances the nation finds itself. Before now, there has been the erroneous impression that with the nation’s oil resources, it is profligate to borrow for any reason.  This is a wrong assumption especially with the nation’s huge population and urgent need for infrastructural development. When put side by side with the situation in the real oil-based economies, it becomes even clearer why the Government is borrowing.

On this latest proposed loan request, the government has consistently explained that, of this amount, US$3 billion is for the refinancing of maturing domestic debt. The balance of US$2.5 billion is to be used to finance some of the capital component of the 2017 budget.

The Minister of Finance, Mrs Kemi Adeosun insists that the external borrowing of US$5.5 billion has the benefit of easing the debt service burden by about N168 billion per annum when compared to the cost of domestic borrowing. 

According to the Minister, other benefits of this debt management strategy include: improvement in foreign reserves as well as reducing domestic debt demand, which will reduce crowding-out of the private sector and support the aspirations of the monetary authorities to bring down interest rates.

The Bretton Woods institutions, the World Bank and the International Monetary Fund (IMF) are also of the view that the Federal Government’s revenue and debt management strategy will significantly lead to a boost in foreign reserves with increased dollar inflow just as it will equally reduce the debt burden and reduce risk. The argument is always there that these loans will be used to execute some important infrastructure that can accelerate growth as exemplified by the recent issuance of Sukuk which will go a long way to enhance the nation’s infrastructure. The N100 billion raised in the process was disbursed to contractors for carefully chosen road projects across the country. In practice, all the foreign loans that were taken in the past have played their part and satisfied the objective for which they were incurred which is the improvement in the economic growth and development of Nigeria. There may be a few hiccups here and there in the utilisation of the money from the loans but overall, the country has benefitted from that infusion of external money.

This economic strategy is outstanding in that the federal government has decided to change the mix of revenue sources available to it from the traditional oil or debt, to a combination of oil, debt and domestic revenue. It is a long-term strategic reform which is critical to future economic growth and in the short-term will enable debt service to revenue ratio to improve. 

Experts on the revenue and debt management strategy aver that taken by itself, Nigeria’s external debt is uniquely of top investment grade.

Empirically, they argue, this position is well supported by investors and the markets. In all cases, all bonds issued by Nigeria have always been oversubscribed, proof of the confidence in the economy as well as the acceptance by players in the field that that is the way to go in the financing of the economy. It is pertinent to point out that in spite of global economic, financial and foreign exchange tribulations, as well as local structural challenges which have manifested since mid-2014 and even the recent recession experienced by the economy, Nigeria’s Eurobonds have continued to trade creditably at stable low yields relative to the weight of the challenges and compared to other countries’ Eurobonds.

For example, Nigeria’s 10-year Eurobond (2013-2023), which traded at an average yield of about 8.727 per cent in January 2016 and at 6.601 per cent in January 2017, has traded at a daily yield of between 5.301 per cent and 5.406 per cent so far throughout the month of October 2017.  Similarly, the yields on both the 2013 – 2018, five-year Eurobond and the 2011-2021, 10-year Eurobond as at October 31, 2017 are lower than their January 31, 2017 figures by about 111 basis points and 164 basis points, respectively.  The scenario from the foregoing is that Nigeria’s Eurobonds are substantially in greater demand and are more highly priced than they were about a year ago.

The country is optimistic that the US$5.5 billion, which will be raised if the National Assembly gives its approval, will also, follow the same positive trend to the benefit of the nation’s economy.

As elsewhere, there will always be those who will worry about whether or not this is not a politically inspired move, seeing that the government is facing difficulties and may want to be seen to be staying afloat. However, it has also been proved that in spite of this, the revenue and debt management strategy has consistently proved that after the initial distraction and exhibition of historically-ingrained pessimistic tendency, investors and the markets have had to realign to the reality that Nigeria’s external debt is, indeed, of a top-class grade – it is adequately insulated from shocks, even deep ones. It has also shown that investors are confident that Nigeria has the capacity to move, and is moving, from economic downturn to turnaround and prosperity – in spite of initial glitches.

Similarly, the strategy has exposed the reality that no matter how much the speculative invasion unleashed against Nigeria’s economy by unimaginative and analytically-static credit rating and news agencies in cahoots with their arm chair local analysts, the boundless investment opportunities, market resilience and positive dynamics of ongoing reforms, which characterize Nigeria’s economy, are well-known to, and usefully digested by, real investors – local and foreign.

Even more than this, it is evident that investors have substantial appetite for new Eurobond issues from Nigeria, an appetite which, in spite of acknowledged alternative investment destinations, only Nigeria can satisfy. The country’s expected foreign borrowing will attract the same beneficial patronage.

James Ume

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