Nigeria Faces Debt Risks 6-Month to Eurobond Repayment
S&P affirms Nigeria’s rating while the global rating agency’s outlook shifted from stable to negative amidst internal and external pressures mitigating against a strong economic trajectory of Africa’s largest economy by gross domestic product (GDP) size.
In its rating note, the rating agency cited low crude oil production, large refined-petroleum subsidy costs, high debt service expenditure, and associated sizable fiscal deficits impacting government’s fiscal and external imbalances negatively.
Six months to Eurobond repayment, overall, government debt servicing costs as a percentage of revenue are high, according to S&P Ratings, affirming the sovereign ratings while it revised outlook on Nigeria to negative from stable.
In the third quarter of 2022, Nigeria’s public debt crossed N44 trillion while Nigeria’s government continues to find it difficult to meet revenue targets. With increased borrowings, interest payments spiked.
The ratings stated that interest payments on CBN bills and Ways and Means in has been included in its calculation of total interest costs. Total public debt is estimated to cross N77 trillion if the government owned up to include overdraft from the apex bank.
Nigeria’s finance ministry proposed the securitization of ways and means debt for 40 years, with a moratorium on principal repayment for three years and a 9% interest rate. Also, President Muhammadu Buhari recently submitted the proposal to the National Assembly for ratification.
In 2023, federal budget estimates a fiscal deficit of N11.34 trillion, which is 5% of GDP to be financed by additional borrowings. Debt service expenditure is budgeted at NN6.3 trillion, 57% of federal revenue of an estimated N11.9 trillion.
“The budget is based on the assumption that petrol subsidies will be removed by mid-2023. At the general government level, it forecasted a fiscal deficit of 5.9% of GDP in 2023 before averaging about 5.4% over 2024-2026, on the assumption a new government will pursue a degree of fiscal consolidation”.
MarketForces Africa reported that the Nigerian government is looking to restructure total debt collected under Ways and Means amounting to about N23 trillion, translating to 12% of gross domestic product (GDP).
In 2023, the Debt Management Office plans to finance the bulk of the budget via domestic issuances; of the N10.6 trillion due to be raised, N7.0 trillion is planned to be raised domestically, with only N3.5 trillion borrowed externally.
External borrowing will constitute N1.8 trillion in multilateral borrowing (largely already granted), and N1.76 trillion ($4.1 billion) in commercial external borrowing–either Eurobonds or syndicated loans–down from N2.6 billion in the 2022 budget.
“The government will likely only issue Eurobonds if market conditions improve, due to high yields in the international markets, and could resort to syndicated loans in lieu”.
The government currently pays an interest rate of almost 20.5% on ways and means priced at monetary policy rate (MPR) plus 3%, according to the rating note.
“We expect interest payments to consume more than a quarter of general government revenue over 2023-2026, indicating a strained debt trajectory”, S&P stated.
The most populous Africa nation failed to benefit from oil windfall due to poor investments in its infrastructure after years of neglect.
S&P said despite being a sizable hydrocarbon, it projects only small current account surpluses of 0.2% of GDP for 2023-2024. The ratings said close to 90% of Nigeria’s export receipts are from crude oil and gas exports.
In its view, relatively high oil prices, and robust remittances will strengthen current account receipts (CARs) in 2023 and 2024 while the increase in the country’s refining capacity owing to the new Dangote refinery will help reduce the import bill beyond 2023.
Despite the continued increase in CARs, costlier imports and clearance of FX arrears, CBN intervention in the Investors and Exporters window will limit the proportionate increase in FX reserves, it said.
“External liquidity remains sufficient for upcoming external redemptions, including the Eurobond maturity of $500 million due in July 2023. Over the past several years, Eurobond interest and redemptions have been paid on time and in full”.
Nigeria plans to remove petroleum subsidies by mid-2023 will weigh on inflation for 2023. According to S&P, the negative outlook reflects increasing risks to Nigeria’s debt servicing capacity over the next one-to-two years due to intensifying fiscal and external pressures.
It said the outlook revision reflects a view that Nigeria’s debt servicing capacity has weakened due to high fiscal deficits and increased external pressures. These stresses stem from low (albeit recently rising) oil production volumes, large refined-petroleum subsidy costs, high debt service expenditure, and a relatively large planned fiscal deficit in the 2023 budget.
The economy is estimated to have expanded by about 2.8% in 2022. However, S&P forecasts real GDP to average 3.1% in 2023-2026.
It noted that below-capacity oil production will likely continue to affect export growth, while inflationary pressure, fiscal constraints, and sluggish investment will weigh on consumption and investment growth.
However, these factors are likely to be partially counterbalanced by a new, potentially more business-friendly administration after the elections. In 2022, oil production (including condensates) averaged about 1.37 million barrels per day (mbpd), below the budgeted 1.60 mbpd, and below Nigeria’s OPEC production quota of 1.8 mbpd.
Low volumes more than offset relatively high average oil prices (at $98, compared with a budgeted $73) in 2022, keeping the general government fiscal deficit at 6.2% of GDP. It noted that significant underperformance of oil revenue in 2022 and higher debt service expenditure support its view that the government’s financial commitments appear strained unless there is credible fiscal consolidation after the elections.
Rising prices of imported goods, payments to clear foreign exchange (FX) backlogs, the Central Bank of Nigeria’s (CBN’s) intervention in the FX market to stabilize the naira, and low oil volume exports reduced gross foreign exchange reserves by about $3 billion in 2022, reaching $38 billion by year-end.
Despite increasing external and fiscal pressures, the firm thinks the government has sufficient debt-servicing capacity to pay the Eurobond maturity of $500 million due in July 2023.
“We forecast that the Nigerian economy will grow 3.3% in 2023, supported by non-oil growth, followed by average 3% annual growth over 2024-2026. We expect the oil sector’s prospects to improve over 2023-2026 as crude oil production levels increase, while significant refining capacity is launched”, it stated. # Nigeria Faces Debt Risks 6-Month to Eurobond Repayment
