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FG’s new debt structure positive for interest rate, fx, lending to real sector – Analysts - BUSINESSDAY

AUGUST 11, 2017

Analysts, both foreign and local, in the financial services sector, yesterday gave a nod to the move by the Federal Government to replace about N900 billion of domestic debts with US$3 billion of foreign debts, saying it is positive for interest rates, exchange rate and the real sector of the economy.

Kemi Adeosun, Minister of Finance, announced on Wednesday at the end of the Federal Executive Council (FEC) meeting that Nigeria will raise new dollar denominated debts to replace $3 billion worth of maturing naira-denominated short-term treasury bills, to lower debt service costs and improve its debt position as the economy recovers from a recession.

Adeosun said the government could borrow at a cost of 7 percent overseas, roughly half the interest rate it currently pays locally. Interest rates on treasury bills currently average between 18% to 22%.

Lower than expected oil and non-oil revenues have seen the Federal Government’s fiscal deficit rise sharply by 101 percent, to a nine-year high of N1.1 trillion in the first quarter of 2017, according to data compiled by BusinessDay.

Razia Khan, regional head of economics, Africa, at Standard Chartered Bank, said that from the perspective of the Nigerian authorities, it is cheaper to borrow from external debt markets for now, given the global search for yield.

“The FG may be looking to reduce the amount it spends on debt service – estimated at more than 40% of revenue collected – by using future Eurobond proceeds to refinance existing domestic debt,” she told BusinessDay in a mailed response to questions.

As at June, the Federal Government deficit has risen to a new high of N2.5 trillion, the governor of the Central Bank of Nigeria, Godwin Emefiele disclosed at the end of the last monetary policy committee meeting in Abuja.

At the current pace of borrowing, the FG’s deficit could swell further to N4 trillion by year-end, analysts estimate.

Bongo Adi, an economist and lecturer at the Lagos Business School, said that what the Nigerian debt managers are doing amounts to a debt conversion, which makes sense given that inflation in the domestic economy has pushed up rates, making Naira loans to attract high interest rates.

The thinking is to take advantage of the low interest rates applicable to foreign currency loans, Bongo told BusinessDay in a telephone interview yesterday.

Nigeria has a N7.4 trillion budget for 2017, the biggest budget ever, in naira terms, even when it does not have the revenues to back it up, with oil trading at half the price today, compared to early 2014.

The budget has a N2.36 trillion deficit, but oil and non-oil revenues have missed the government’s target by almost 50 percent, according to CBN data, stoking the deficit and forcing government to borrow at a frantic pace, which is already crowding out the private sector. While credit expansion to the government has been growing, credit to the private sector has actually declined.

“Because this is essentially a debt conversion and some sort of hedging, it is not going to reduce the level of government’s debt,” Bongo said. “I don’t see the move impacting credit to the private sector, except they reduce the spate of borrowing at high rates.

Tajudeen Ibrahim, head of research at investment bank Chapel Hill Denham, said that if the plan is consolidated with a rate cut by the Monetary Policy Committee (MPC) in the near future, a sharp fall in interest rates across all tenors could materialise at some point, which may then translate to a positive for private sector lending.

The Federal Government’s gross revenue was N458.42 billion in May, 48.8 percent short of the monthly budget estimate of N894.76 billion, according to the CBN’s monthly report.

This has been the trend throughout this year. Actual revenues have flunked government targets, plagued by huge slippages in non-oil revenues and low oil prices and production to a less extent now.

The country’s non-oil revenue, expected to relieve oil as the government’s dominant source of cash, came in at N1.13 trillion in the first five months of 2017.

That is half the size of a N2.2 trillion five-month target set by the government (federal and states) for 2017.

Meanwhile, various analysts, and more recently, the World Bank, have expressed concerns over Nigeria’s debt profile, citing the inadequacy of current revenues to sustain interest rate payments.

For each naira earned, government coughs up 40 kobo in interest payments, according to the International Monetary Fund (IMF).

Economy watchers also hinted at the stabilisation impact it may have on the naira, which has suffered substantial devaluation since 2015.

“This move will improve liquidity in the foreign exchange market and therefore help stabilise exchange rate or even appreciation of the naira,” said Taiwo Oyedele, head of Tax and Regulatory Services West Africa, at PwC.

Charles Robertson, global chief economist of Renaissance Capital said it makes sense to borrow more abroad at around 6-8% in dollars than 15-20% locally. The pressure on the government is not from dollar outflows – the current account is in balance. The pressure is on the budget, where high interest rates mean interest payments are high relative to budget revenues.

“The opportunity here is to save 10pc a year in interest payments which is 10pc that can be spent on infrastructure and development. The only risk is of oil prices halve to $25 for an extended period as the naira should weaken and the debt will be more expensive to repay”, Robertson said in an emailed response.

Olutola Oni, analysts at WSTC Financial Services limited, said the FG’s plans to restructure the current debt structure by increasing the proportion of foreign debt should be positive for the real sector. Replacing local debt with foreign debt should ease the crowding out effect on the private sector and the rate on government borrowing. In addition, the dollar inflows from the foreign debt should shore up Nigeria’s stock of foreign reserves.

“However, given the nation’s current account position, the new debt structure will further expose Nigeria’s balance sheet to FX risk”, Oni said in emailed response.

Uche Uwaleke, Associate Professor and Head, Banking and Finance department, Nasarawa State University, said the FG plan is consistent with the DMO’s debt management strategy of rebalancing the country’s debt Stock from the about 84:16 (domestic:foreign) ratio currently to 60:40. The merits outweigh the demerits by far.
On the contrary, Uwaleke said foreign debts have long tenor and often come with grace periods, adding that this move will free up loanable funds for lending to the real sector as the government will compete less for these funds and crowd-in the private sector in the process. Interest rates will gradually come down and the foreign currency inflow will impact positively on the nation’s foreign reserves giving the CBN more room to improve liquidity in the forex market and stabilise the exchange rate

The Federal Government’s total domestic debt stock as at March 2017 rose 8 percent, to N11.9 trillion, from N11.05 trillion as at December 2016, while external debt stood at $US 39 billion, according to data from the Debt Management Office (DMO).

Old worries over government’s rising debt profile were rekindled after Central Bank Governor, Godwin Emefiele said at the last monetary policy meeting, that the Federal Government’s deficit hit N2.5 trillion in the first half of the year.

Ben Akabueze, the director-general of the Budget Office of the Federation, however said at a consultative forum in Lagos that the N2.5 trillion deficit was “tentative” and “incomprehensive.” and that “it could turn out much less than that.”

Nigeria’s total debt stock rose 10 percent to N19.15 trillion at the end of first quarter 2017, from the N17.36 trillion at the end of last year, according to data from the Debt Management Office (DMO).

Adeosun said the government was aiming to restructure its debt portfolio into longer-term maturities by borrowing more offshore and less at home to lower cost and also support private sector access to credit to boost the economy.

Adeosun said the government would issue dollar debt as $3 billion worth of naira treasury bills mature.

“We are not increasing our borrowings. We are simply restructuring. Instead of owing naira, we will be owing dollars,” Adeosun said.




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