Nigeria Debt Faces Sustainability Threats, Default Risk Rises

Nigeria Faces Debt Sustainability Threats, Default Not Impossible – Analysts

Default risk heightens as Nigeria has breached all debt control measures put in place to checkmate the nation’s borrowing spree amidst a struggle to drive economic growth higher. The debt-to-gross domestic ratio has crossed the target, and debt service to revenue has worsened beyond expectations, with a worsening fiscal deficit as a percentage of GDP.

Nigeria had set its debt-to-GDP ratio at 40%, but current data shows that level has been breached as the debt-to-economic balance sheet ratio printed at 40.5% in June. However, the ratio continues to trail the 55% set by the International Monetary Fund.

The debt-to-revenue ratio surged to 99% at the end of the secondary quarter, which is higher than DMO’s 50% threshold and 20% target set for low-income countries by the IMF. The Federal Government has also doubled its budget deficit as a percentage of the nation’s GDP, settling at 6.4% in recent times, compared with 3% target set by the Fiscal Responsibility Act., and 5% by the IMF.

In separate discussions, analysts are of the few that Nigeria’s total public debt is fast becoming unsustainable due to weak revenue from hydrocarbon sales as a result of lower production volume, high budget deficit and rising debt servicing costs.

It was also noted that Nigeria’s public debt is expected to rise further given the sustained borrowing tendency of the government. According to the recently released data by the DMO Nigeria’s public debt profile rose by 75% to N87.38 trillion in the second quarter of the year from N49.85 trillion.

Compared with the first half record in 2022, public debt has increased by 104%. At the current level, Nigeria’s total debt is equivalent to 43.7% of 2022 nominal GDP. This is above the DMO debt-to-GDP ratio target of 40% within 2020-2023, Coronation Research said in its note.

The surge was pushed by the inclusion of N22.71 trillion in securitized Ways and Means Advances in the local debt numbers. Due to weak economic performance that drained both federal and state fiscal results, there were additional borrowings in the first half of 2023.

Macroeconomic analysts’ reviews showed that Nigeria’s external debt outstanding rose by 69.3% in three months to N33.25 trillion while domestic debt settled higher at N54.13 trillion. In the first quarter of 2023, Nigeria’s total domestic borrowings was N30.21 trillion.

In foreign currency, Nigeria’s external debt stock increased marginally by 1.4% in the second quarter to $43.2 billion from $42.6 billion recorded at the end of March 2023.

The naira value surged strongly due to the new exchange rate of N769 per US dollar, which translated to 80% depreciation from N425.1, which DMO had used to convert US dollar exposure to local currency value.

Following the securitisation of the CBN’s Ways and Means Advances, local currency depreciation, and the expected increase in new borrowings to fund the 2023 budget deficit, Cowry Asset Management said it expects the public debt outstanding to settle at N90.49 trillion in 2023.

According to the investment banking firm, this would translate to 43.1% of GDP, a significant increase when compared with public debt of N46.25 trillion in 2022, or 23.2% of GDP at the time. The constraints around government revenue growth have led to an overreliance on borrowing to finance the FGN budget. There are deliberate efforts towards strengthening the fiscal landscape.

“It will be too expensive to make a Eurobond call at the moment. However, Nigeria needs to increase receipts from export deals to keep multiple pressures facing the country in check”, research analysts at LSintelligence Associates said. Nigeria’s crude oil production (including condensates) resumed its uptrend, increasing by 8.5% to 1.41 million barrels per day in August from 1.30 mbpd reported in July.

According to analysts, the increase was supported by a 35.5% jump in volumes from the Forcados terminal as crude oil production activities resumed at the facility following the leak-induced shutdown in mid-July. Cordros Capital said in its report that crude oil production volume also increased in August across the Bonny (+68.5%), Qua Iboe (+12.3%), and Bonga (+2.2%) production terminals.

“While progress is still underway as regards the fight against crude oil theft and vandalism, we believe that frequent leaks from pipelines and intermittent oil terminal shutdowns for repairs pose downside risks to crude oil production in the near term”.

Debt Services

Nigeria spent N2.34 trillion to service the nation’s debt servicing in the period. This was split as N1.44trn on domestic and N900bn on external. Analysts said as a result of this, the debt-service-to-revenue ratio stood at 83%.

“We expect debt service costs to remain elevated (in nominal terms) due to the impact of the FX liberalization policy and additional borrowing on the back of the FGN budget deficit”, Coronation Research said in a macroeconomic note.

In a separate report by the DMO, the debt-service-to-revenue ratio for 2023 was pegged at 75%, reflecting the urgent need to improve government revenue. According to the DMO, to achieve a sustainable debt-to-GDP ratio, the FGN needs to increase its revenue base from the projected N10.5 trillion for 2023 to about N15.5 trillion. #Nigeria Faces Debt Sustainability Threats, Default Not Impossible – Analysts

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