Eventually, Nigeria’s Capacity to Service Debt May Come under Pressure –IIF
President Muhammadu Buhari

Eventually, Nigeria’s Capacity to Service Debt May Come under Pressure –IIF

In its macroeconomic report, IIF said it finds that investor interest in the region has increased significantly in recent months in the context of increasing risk-on sentiment in financial markets.

The Institute affirmed that most of the countries in SSA weathered the COVID-19 shock better than developed market (DM) and other emerging markets.

This is likely due to higher baseline growth going into the crisis as well as, importantly, smaller-than-expected virus outbreaks (apart from South Africa).

Significant challenges remain, particularly with respect to the financing of significantly wider fiscal deficits (Ghana, Kenya), medium-term debt sustainability (Kenya), and the functioning of the monetary policy transmission mechanism (Nigeria).

IIF said 2020 GDP contraction in SSA is likely to be smaller than in most emerging and developed markets.

It said Ghana is expected to avoid a decline in economic activity (+0.8%) as a result of a relatively small GDP contraction in Q2 on quarter on quarter basis.

The Institute said while the recession in Kenya is expected to be relatively small (-0.6%), Nigeria’s economy will shrink by around 3.2%, due to, among other reasons, OPEC+ commitments.

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It understands that SSA region was hit by a combination of shocks to commodity prices, remittances, tourism, and capital flows.

IIF explained that even though activity is holding up somewhat better than in other regions, the sharp slowdown’s impact on revenues, together with a need for social spending, has worsened the already challenging fiscal outlook.

Fiscal deficit financing will be particularly challenging in Ghana, where it projects the deficit to rise to around 12% of GDP in 2020, compared to about 4% in Nigeria and about 8% in Kenya (FY20/21).

Experts think debt sustainability will likely become a concern in both Ghana and Kenya, where debt as a share of GDP will reach 70% or higher in the coming years.

Kenyan authorities announced that they are considering participating in the DSSI following some clarification from ratings agencies as to the treatment of such a step.

IIF said DSSI eligible SSA countries had difficulties tapping capital markets during the pandemic.

However, it was noted that roughly half of them continued to see net banking inflows.

EM, particularly those with IG ratings, were able to access international bond markets throughout 2020 and, markets are increasingly seeing issuance from FM, including DSSI-eligible Côte d’Ivoire.

It said Ghana, Kenya, and Nigeria are likely to follow.

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Explaining further, IIF remarked that Nigeria’s public debt is less of a concern than in other SSA countries (23% of GDP).

But the Institute explained that revenue mobilization remains extremely weak—an issue across the region—and OPEC+ production limits, together with markedly lower oil prices, have reduced FX inflows.

Eventually, Nigeria’s capacity to service debt may come under pressure, the Institute explained.

In the report, the Institute explained that improvements to the monetary policy framework are key to attracting inflows to the local market and bring in FX.

Experts believe that two major issues have led to hesitancy among foreign investors

The issue listed include the slide of real interest rates into negative territory due to high inflation, and the inability of investors to exchange Naira repayments into FX.

It noted that limited access to FX has also impacted local corporates and weighed on economic activity.

IIF said since August, the CBN has restarted FX transactions and reduced the backlog from $2 billion to $0.6-0.8 billion, but continuously maturing local debt (foreign-short-term instruments of roughly $10 bn remain) will cause FX issues to persist well into 2021.

With foreign investors remaining hesitant to reengage, the government will have to rely on deficit financing via the domestic financial system and the CBN.

In Ghana, the central bank stepped up government bond purchases again in September for a total of GHS15 bn in 2020, which helped close a large domestic financing gap.

Going forward, IIF said even under the assumption of successful Eurobond issuance to the tune of $3 bn in 2021, financing persistently large fiscal deficits will be a challenge.

IIF stated in the report that the Bank of Ghana’s claims on government are up to 35% of total assets as of September (from 21% at the beginning of the year).

It stressed that domestic banks’ absorption capacity will also be limited going forward, as claims on government currently represent more than one-fourth of banking system assets (a steep increase from 12% two years ago).

“With presidential and parliamentary elections now out of the way, barring disputes regarding the results, we hope the authorities will be able to focus on a credible fiscal consolidation strategy”, the Institute stated.

Kenya recently entered negotiations with the IMF over a multi-year program that would help anchor a credible fiscal consolidation path, centered on raising tax revenues and supported by IMF financing.

The report indicates that external public debt has risen to $30.8 bn at the end of 2019 from $16.3 bn four years prior, and the IMF classifies Kenya as at high risk of debt distress.

Amortization in 2020-21 is dominated by Chinese loans and amounts to 1.5-1.6% of GDP.

IIF said Kenyan authorities plan to focus borrowing on concessional funding and may access the Eurobond market only for liability management.

“The domestic financial system should also have ample liquidity to absorb additional sovereign issuance in the local market.

“Authorities recently surprised markets by stating that a participation in the G20’s DSSI is being considered.

“However, a lot will depend on China as it accounts for a large share of debt and upcoming repayments”, the Institute explained.

On Zambia, it stated that recent developments where a Chinese development bank agreed to a postponement of debt service, indicate that China may be willing to consider renegotiation of pending payments in order to play a constructive role throughout the region.

“We have seen a meaningful return of foreign investors to Emerging Market, a trend that is gradually extending to frontier market.

“Following Côte d’Ivoire’s successful Eurobond issuance of $1 bn in November, we expect several SSA countries to tap international markets in 2021, while also relying on multilateral funding.

“However, fiscal challenges remain, and investors are likely to be selective, particularly as far a return to local markets is concerned.

“Countries such as Ghana and Nigeria, which have established local markets and have seen meaningful non-resident participation in the past, would benefit first and foremost—conditional on prudent policies.

“Much also depends on a continuation of the current risk-on sentiment in global financial markets”, IIF said.

Eventually, Nigeria’s Capacity to Service Debt May Come under Pressure –IIF