Naira yields seen falling as Senate approves $5.5bn external loan

by | November 15, 2017 2:30 am

The Nigerian Senate on Tuesday gave a nod to President Muhammadu Buhari’s request to tap some $5.5 billion from foreign investors to plug a widening hole in the country’s finances.

The approved external loan, first requested by Buhari in October, would include $2.5 billion in Eurobonds to plug part of the 2017 budget deficit and $3 billion to refinance maturing domestic debt in a bid to lower the country’s funding costs.

“The USD refinancing is likely to displace the need for NGN borrowings which implies softer local fiscal issuance going into 2018,” said Wale Okunrinboye, head of fixed income and currency research at Ecobank.

Okunrinboye sees the “increased prospects for monetary policy easing and tamer net OMO bill issuance,” as signals that a decline in naira yields going into 2018 is in the offing.

“We see scope for sizable declines in the naira yield curve in the near term as domestic pension funds frontload buying activity,” he said in an emailed response to BusinessDay.

A decline in naira yields will help ease the pressure on government’s rising debt service costs and could free up more lending to the private sector, driving down the cost of funds for businesses which in turn is positive for the economy in terms of company expansion and job creation.

Additionally, analysts say the Eurobond raise would provide an uplift to Nigeria’s foreign reserves, currently at an estimated USD 34 billion and leave the CBN in a position to keep up interventions across FX markets to stabilise the naira and further loosen FX restrictions.

Nigeria’s benchmark bond yields have consistently fallen since September, declining further by an average of 0.026 percent on Tuesday, according to FMDQ data, as foreign investor appetite builds.

Stronger oil prices of late and higher reserves point to a stable exchange rate outlook which is likely to drive increased foreign participation in local debt markets, according to Okunrinboye.

“However, as bond yields are now negative in real terms, we would expect inflation to drop below 15 percent in the rest of 2017 to fuel a fresh rally in bonds. In all we expect lower issuance by both the CBN and FGN to remain supportive to continued declines in bond yields,” he said.
The $5.5 billion will take Nigeria’s total external debt to $20 billion from $15.4 billion as of June 2017, according to data from the Debt Management Office (DMO).

The Federal government’s domestic debt sits at some N12 trillion.

“The FG’s plan to borrow US$5.5bn is expected to further support the financing of capital projects in the 2017 budget with a target capex release of 50% by December 2017,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham.

“We expect yields to moderate further if the government implements its plan to reduce its reliance on local borrowings to finance the budget,” Ibrahim said in an emailed note to clients.

The proposed Eurobond issue is part of the government’s strategy to shift its debt portfolio toward 60 percent domestic and 40 percent external from a current 84:16 split by the end of 2019, amid concerns over the crowding out of private sector lending.

Meanwhile, the $2.5 billion going into funding the 2017 budget, if utilised as planned, will “boost economic activity, and pose a sign of relief that the government will have more funds to channel into projects, following the revenue shortage that we have seen in the past 6 months,” according to Ayo Akinwunmi, head of research at FSDH Merchant bank.

The Federal government disbursed a total of N450 billion for capital projects as at October 31 2017, according to the minister of Budget and National Planning, Udoma Udo Udoma on Tuesday while giving a breakdown of the proposed 2018 budget.

“Government projects to expand more revenues through new funding mechanism for JV operations, allowing for Cost Recovery in lieu of previous cash call arrangement. The government projects to generate up to 10.7 percent of the expected revenues through JV Equity Restructuring,” Udoma said.

Additional oil-related revenue including Royalty Recovery, New/Marginal Field Licences, early licensing renewals are also being expected.

The government also intends to review the fiscal regime for Oil Production Sharing Contracts (PSCs), according to the budget minister.

Udoma also announced plans to restructure government’s equity in JV oil assets, (reduction in equity holding) with proceeds to be reinvested in other assets.

“This will improve efficiencies in the operations of the JVs and position them for better revenue performance in the future,” Udoma stated.

“Implementation of the recurrent portion of the 2017 budget actually commenced in January 2017, based on constitutional provisions,” Udoma said at the presentation, Tuesday.

“But we could not start the implementation of the capital budget until after the 12th of June. The capital budget has been implemented for about 4 months,” the budget minister said.

Pressed to spend its way out of slowing economic growth, Nigeria has planned expansionary budgets in three successive years, including 2018, giving special preference to capital projects.

However, the implementation rate of capital expenditure has remained low in 2017, due to delayed passage of the budget and revenue shortfalls.

Oil revenue lagged projections in the first six months of 2017 as average oil production of 1.81mbpd in H1-2017 was 17.7 percent below the budget benchmark of 2.2mbpd, resulting in the 61.0 percent shortfall in oil revenue for H1-2017.

Non-oil revenue also lagged the budget by 50.0 percent in H1-2017 partly due to lower tax receipts, reflecting the weak macro, while other revenue was also behind budget by 69.4 percent.

While the FG plans to increase capex by 22 percent in 2018, the impact of capital spending on the economy will be dependent on actual release of funds for capital projects, according to Lagos-based Chapel Hill Denham.

“The FG adjusted for the capex component (N1.2tn) of the 2016 budget to run over a 12-month period, ending May 2017 and we expect this to be repeated in 2017/2018.

In H1-2017, there was no allocation to capital projects, but the FG has allocated N450bn to capital expenditure projects so far in H2-2017E (21% of the 2017 capex budget),” Chapel Hill Denham analysts said.

Specifically, the N100bn proceeds from the Sukuk bond went into the financing of 25 road projects.

The 2018 budget proposal of 50 percent in domestic borrowings (N849.5bn) is in line with the plan to cut back on domestic debt.

The $5.5 billion debt issuance implies external debt will increase to 5.3 percent of GDP at year-end 2017 from 3.9 percent in June, according to estimates of Moscow-based investment bank, Renaissance Capital.

“On the face of it, this decision might be viewed as good maths as the yield on Nigeria’s existing Eurobonds trade at around 10 percentage points lower than domestic local-currency bonds of similar maturity,” said Mark Bohlund an economist at Bloomberg Intelligence.

“But higher inflation puts downward pressure on the naira, which means that borrowing in a foreign currency may become more expensive than it looks.

“A higher degree of foreign borrowing would also impair the authorities’ ability to counter economic shocks by reducing interest rates because doing so would prompt exchange-rate depreciation and drive up the servicing cost of public-sector debt in foreign currency,” Bohlund said.

Kemi Adeosun, Minister of Finance clarified that the government has not granted any Tax Holiday to any company operating in Nigeria, rather it is doing tax exchange  with companies who are willing to do some key roads that have economic linkage to government business in exchange for the amount they will pay in taxes.
The Minister while fielding questions on Tuesday at the 2018 budget proposals breakdown said the government is prioritising tax and has not and will not give out any Tax Holiday to anybody with the current situation of the economy, which recently eased out of recession at 0.55 percent.

Adeosun said, “The beauty of tax payment is that it is progressive. The problem we have in Nigeria is that we only have about 14 million tax payers, while we have about 69 million people working or doing one form of economic activity or the other and are not paying taxes.”


Onyinye Nwachukwu, ABUJA, LOLADE AKINMURELE, MICHAEL ANI, Endurance Okafor, Oladipo Oladehinde, Lagos