The plans by the Debt Management Office (DMO) to sell an additional $2.50 billion Eurobond in order to complete its debt programmes will increase Federal Government of Nigeria’s (FGN) portfolio to $8.80 billion from $6.30 billion.
Nigeria has been selling Eurobonds to foreign investors issuing since the start of last year as it seeks to fund its capital budget and reduce local currency debt burden.
The $2.5 billion will be used to refinance a portion of the country’s Treasury bill portfolio at lower costs.
Patience Ohina, Director General of the Debt Management Office (DMO) said that government wants to increase the proportion of foreign borrowing to 40 percent of debt stock from under 30 percent currently.
Analysts at United Capital Limited in a recent note said the $2.5bn Eurobond inflow will further boost Nigeria’s external reserves position and improve currency market liquidity amid rising oil prices.
“Buttressing the argument for JPM’s re-inclusion, additionally, it will slightly moderate debt servicing and support capital spending,” said analysts at United Capital Limited.
In order to lower costs, government repaid N198 billion worth of treasury bills in December, instead of rolling them over.
The repayment of domestic debt has resulted in a precipitous drop in yields on treasury bills to 13 percent from between 21 percent and 22 percent early last year.
While the country has a favourable debt to GDP ratio- one of the lowest in Africa- its huge interest payment to revenue ratio is raising concerns about debt sustainability.
“Debt sustainability will remain a concern despite the lower Debt-to-GDP ratio (the major argument for increasing debt stock). This is mainly because Nigeria’s sharp rising debt service/revenue ratio currently ranks very high (projected at 30.5 percent in 2018 from 32.7% in 2017) compared to peers,” said analysts at United Capital Limited.
A sudden drop in oil price and an attack on oil facilities by Niger Delta militants could damp government’s ability to pay back debt owed to creditors and send negative signals to the market.
Nigeria exited its first recession in 25 years in the third quarter of 2017, thanks to a rebound in oil production due to the relative calm in the Niger Delta region and uptick in oil price.
Available data from the Debt Management Office (DMO) shows Nigeria’s debt stock stood at N19.16 trillion as at March 2017.
A breakdown shows external debt accounted for N4.23 trillion, while domestic debt stock accounted to N14.23 trillion.
“According to the 2018 budget, proposed debt service (N2.0tn) remains high, almost crow ding out total CAPEX spend (N2.5tn), almost crowding out total CAPEX spend (N2.5tn). Hence, there is a need to critically examine current debt position to ensure the long – term gains of CAPEX spend is guaranteed,” said analysts at United Capital Limited.