MPC, DMO worry over Nigeria’s debt structure

BY EMEKA EJERE

Increasing Eurobonds component in the Nigeria’s external debt structure is raising concerns about the dangerous implications of exposure to high interest costs and exchange rate risk associated with the debt instrument.

The Debt Management Office (DMO), said on Tuesday that Nigeria’s total public debt stock increased to N41.60tn in the first quarter of 2022 from N39.56tn as of December 2021, an increase of N2.04tn within a period of three months.

This has seen the country’s debt service to revenue ratio rise to 80 per, an increase of 400 basis points when compared to the 76 per cent it was at the end of 2021. A debt service to revenue ratio of 80 per cent implies that for every N100 earned by Nigeria, N80 is spent servicing debt.

According to the DMO, the total public debt stock includes new domestic borrowing by the FG to partly finance the deficit in the 2022 Appropriation Act, the $1.25bn Eurobond issued in March 2022 and disbursements by multilateral and bilateral lenders.

Data from DMO show that despite the increase in the benchmark monetary policy rate (MPR) by the central bank in May 2022, Nigeria’s Eurobond yields for long term instruments are still hovering above 10%

After holding the MPR constant at 11.5% for about two and a half years, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), raised the benchmark interest rate by 150 basis points to 13% in response to global inflationary pressures, and dwindling foreign exchange in the economy.

Some market analysts who had hoped that investors in Nigeria’s fixed income market may benefit from the rate hike, with adverse effects expected in the equities market, are yet to see that happen.

For instance, Nigeria’s Eurobond Yield with a maturity of 2027 closed trading on 31st of May 2022 at a yield of 9.79% from 8.95% recorded as of the end of April 2022. The Eurobond has a total face value of $1.5 billion and was borrowed at a coupon of about 6.5% when it was initially issued.

Bond yields have risen in recent times following the increase in interest rates by the U.S Federal Reserves, which was a response to the record-high inflation rate experienced in the world’s largest economy.

The federal government had early last month shelved its plans to raise about $950 million selling overseas bonds, owing to unfavourable market conditions during the time frame approved for the fundraising, according to the Minister of Finance, Zainab Ahmed.

Ahmed had in April said the government planned to sell its second external debt this year in May to help plug fiscal deficits. The planned $950million bond sale was to account for the balance of $6.1 billion in overseas borrowings planned for 2022 after it raised the second tranche of $1.25 billion in March.

“We were not able to do that because the market pricing was not good and also the approval period for us has closed. The approval period was up to May 31, 2022, so we are not going to be able to take that one anymore,”

Ahmed had said in an interview with Bloomberg on the sidelines of the Islamic Development Bank meetings in Egypt.

Nigeria was one of the first sovereigns to access the Eurobond market after the start of the Russia-Ukraine conflicts, which stoked commodity prices and inflation just as the US Fed raised interest rates.

The country’s seven-year bond in March was priced to yield 8.375%, compared to a similar maturity raised about nine months ago with a coupon of 6.125%. According to DMO daily report, Nigeria’s $750 million for January 2049 Eurobond currently prints a yield of 11.365% as of 31st May 2022.

With an inverse relationship between bond prices and their yields, the uptrend in Nigeria’s Eurobond yield occurs when investors in the international debt market sell Nigerian Eurobond, triggering a fall in the prices of the bonds.

By implication, the rise in Eurobond yields means that Nigeria will pay huge interest in order to encourage market players to buy its Eurobond.

But the fact that the Nigerian economy is in dire need of foreign exchange, which other sources cannot meet satisfactorily, makes the international market the fastest means to cushion the surging forex demand.
Raising the alarm

Members of the CBN’s MPC are worried that the federal government’s preference of Eurobonds at high interest costs, with the associated exchange rate risk may likely hurt Nigeria soonest.

In his personal statement in the just released communiqué of the May 2022 meeting, a member of the Committee, Asogwa Robert, said:

“The escalating fiscal sector deficits with the attendant rising debt ratios are part of the weak links in the domestic economic environment.

“Particularly worrisome about the debt structure is the increasing accumulation of Eurobonds in the external debt component, while minimising concessionary loans.

“The unexplained government preference of Eurobonds at high interest costs, with the associated exchange rate risk may likely hurt Nigeria sooner than anticipated.

“Already, Nigeria is being mentioned by the IMF (International Monetary Fund) as one of the countries that may likely move into debt distress, given the staggering $100.07 billion dollars of public debt stock as at March 31, 2022.”

The IMF had in May warned that except the federal government put in place adequate measures to improve revenue generation, its entire earnings may be spent servicing debt by 2026.

The Fund revealed that based on a macro-fiscal stress test that it conducted on Nigeria, interest payments on debts may wipe up the country’s entire earnings in the next four years.

The IMF’s Resident Representative for Nigeria, Mr. Ari Aisen had while speaking at the presentation of the latest Sub-Saharan Africa Regional Economic Outlook, in Abuja expressed worry that many African countries, including Nigeria risk sliding into critical debt servicing problem unless urgent actions were explored to significantly raise revenue.

On his part, another member of the MPC, Mr. Adenikinju Festus, in his personal statement said: “I am worried that Nigeria is not able to benefit maximally from the current upsides in the global oil market.

“I am concerned about government budgetary performance. The rising share of governments in total credit to the economy by the banking system suggests crowding out effects of private sector borrowings.

“Government should divert to non-debt means of funding its activities. Government must grow its revenue base, reduce waivers to economic agents, plug leakages and wastes, and address the wasteful petrol subsidy system.”

However, a financial markets expert and chairman of Skymark Partners Limited, Mr. Egie Akpata, believes that government’s growing interest in Eurobonds is justifiable.

“I do not think it is premature for Nigeria to return to the Eurobond market after issuing $1.25 billion in March”, Akpata had said responding to a potential $950m bond issue in May.

“The sad reality is that the federal government is running a very large deficit which cannot practically be funded only from the local markets. Also, Eurobond yields have been rising, so the sooner Nigeria sells a new issue, the cheaper it would be relative to waiting till later in the year.

“The justification for another issue is the need to fund the federal government’s deficit, and not because of the secondary market performance of existing Nigerian Eurobonds.”