Low FCY Exposure Reduces Nigeria's Debt Distress Risk
Patience Oniha - Director General, Debt Management Office

Low FCY Exposure Reduces Nigeria’s Debt Distress Risk

Nigeria’s low foreign currency (FCY) exposure has been interpreted to mean a moderate risk of debt distress for the Nigerian economy, CSL Stockbrokers Limited said in a report titled: “surviving amidst uncertainties”.

According to the report, due to low revenue mobilization, Nigeria public debt has more than doubled to NGN32.22 trillion as at Q3-2020 from 2015 levels of NGN12.60 trillion.

In a report, WSTC Financial Services projected that the nation’s exposure would print at N33.828 trillion in 2021.

However, the investment firm forecast nominal gross domestic product to hit N160.368 trillion from N151.291 trillion budgeted for year-end 2020.

It is expected that Nigerian government will maintain previous domestic to foreign borrowing ratio of 57:43 in 2021.

“The FGN intends to finance its 2021 N5.62trn budget deficit majorly via a 50/50 combination of domestic and foreign borrowings.

“The planned domestic borrowing is projected at N2.34trn, while the planned foreign borrowing is also estimated at N2.34trn.

“Owing to our expectation of lower-than-estimated revenue, we believe that a wider fiscal deficit would prompt the FG to take on higher-than-planned domestic borrowings, amid a low-yield environment.

“The debt stock of the FGN could rise to N34trn in 2021, which would take debt-to-GDP ratio to 21%”, WSTC explained.

The monetary policy dovish stance on interest rate continues to drag yields on government debts securities, thus making domestic borrowing cheaper.

Despite this, the apex bank has maintained strong support or what analysts call loyalty to the government by absorbing significant chunk of the budget deficit as overdraft.

Rising inflation rate has depressed fixed income market return such that investors are betting more on short-dated instruments.

Analysts said low interest rate environment has been supported by strong liquidity in the financial system as Central Bank banned some individuals from participating at its auctions.

“The financial repression has pushed foreign investors aside, and this has result to lower foreign exchange inflow”.

On the back of higher fiscal debt, Nigeria’s total public debt is projected to reach 35.5% of GDP in 2021 from 35.0% in 2020.

CSL Stockbrokers however said this remains lower than most Sub-Saharan Africa (SSA) peers like Ghana with debt to GDP ratio of 76.7% and 66.5% in Kenya.

The firm noted that due to consistent higher than planned budget deficits, the CBN continues to absorb over 40% of the fiscal deficit through overdraft facilities.

Thus, the interest cost of this facility is estimated at MPR +3 basis points, according to CSL Stockbrokers.

“The country remains in moderate risk of debt distress mainly due to low stock of foreign currency denominated debt, which has masked the impact of exchange rate shock.

“Nonetheless, higher interest payments will continue to absorb a significant portion of federal government revenues, making the low debt-to-GDP ratio highly vulnerable to shocks”, it added.

Naira was devalued across all the segments of the FX market in 2020, following the pressured external reserves amidst elevated FX demand and waned inflows.

The investment firm said in 2021, with crude oil prices poised to improve alongside dollar dominated-budget facility from the World Bank, it expects the CBN’s monthly intervention to gradually increase to pre-pandemic levels of aboutUS$3.2 billion as against the current levels of US$1.4 billion.

“With Naira still trading above its fair value, we expect the CBN to devalue the Naira to at least NGN420.0/USD in 2021”, the firm added.

CSL explained that as the CBN intensifies its intervention, the Institute of International Finance (IIF) estimates that FX backlog has reduced from USD2.0bn in August to USD600m-800m in December.

“As such, we expect daily turnover at the I&E window to improve significantly close to the pre-pandemic levels.

“The impetus for new foreign portfolio investment (FPI) inflows will likely remain tepid, save for a significant increase in OMO yields”, it noted.

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Low FCY Exposure Reduces Nigeria’s Debt Distress Risk