Federal Government of Nigeria
President Muhammadu Buhari

“Nigeria pays more on Eurobond than other African countries”

The Institute of International Finance, IIF, has said that Federal Government of Nigeria, FG, has been paying a relatively high cost on its Eurobond financing at current yields above 6.5% compare to its peers with similar credit rating.

The Institute stated that other countries with similar credit ratings -around non-investment, speculative grade- such as Ethiopia, pay much lower yields.

According to IIF, this has substantially raised interest payments.

It noted that at the same time, legacy Eurobond debt will begin to mature over the medium term, further exacerbating the government’s financing needs and pressures on the exchange rate.

“At the core of Nigeria’s external financing and budget issues lies the country’s over-reliance on oil exports receipts, which have been disappointing in the context of production constraints and falling oil prices”, IIF stated.

In its review, IIF noted that the nation relies on “hot money” flows to keep its balance of payments stable.

The institute stated this as it observed that with the central bank increasingly borrowing at short maturities and high yields to finance the government’s deficit.

Oil production capacity constraints, together with relatively low oil prices, have limited Nigeria’s main source of external funding and government revenue, the institute noted.

It observed that at the same time, revenue mobilization remains weak due to persistently low non-oil receipts (below 4% of GDP).

As a consequence, interest payments will dominate the budget going forward, currently standing at roughly 60% of revenue.

The Institute thinks that crowding out of other spending will constrain Nigeria’s ability to diversify its economy, address the infrastructure gap, and raise growth to stabilize the budget.

Tracking the historical trend, it said following the collapse in oil prices in mid-2014, Nigeria’s current account turned from a steady surplus to a deficit.

At the same time, capital inflows dried up, resulting in reserve losses. In recent years, the current account has remained weak, but “hot money” inflows have picked up.

In its review, the Institute stated that initially, these flows consisted primarily of long-term loans but are now dominated by short-term portfolio debt.

“Such external financing is needed to fund government deficits, which cannot be absorbed by the domestic banking sector.

“This is the case since domestic banks’ assets are heavily concentrated in the oil sector, where NPLs are large, and capital provisions are low.

“A substantial share of short-term portfolio flows comes from non-residents participating in central bank auctions of CBN bills, the Institute reckoned.

The review reads that auction proceeds are then used by the central bank to finance government deficits through the buying up of treasury securities. The deficit, in parallel, has been partially financed through the issuance of Eurobonds.

It said: “This is a relatively recent development, with issuance in 2017-18 totalling more than $10 billion.

“Prior to this, such issuance had been near the lowest in Sub-Saharan Africa among countries that issued any Eurobonds”, it added.

While a brief recovery in oil prices from 2017-18 lead to a small current account surplus, the current account has returned to a deficit in recent quarters and we expect this to continue in the medium term.

The review note reads that the deficit is also likely underreported as restrictions on FX access have led to considerable food smuggling across borders to meet demand for food products, which local producers have been unable to supply.

“We do not expect the current account surplus to return as a source of external financing due to persistently low investment in the oil sector, which has led to a significant decline in oil production in recent years”, IIF positioned.

It however observed that ongoing issues with the security situation, specifically terrorist attacks on pipelines and theft, have also hurt production.

In its estimates, it noted that current volumes struggle to reach 2 mbpd, a 10% decline compared to 2013 and 20% decline from its peak in 2010.

“Nigeria is increasingly reliant on expensive “hot money” flows into the local market and Eurobond issuance. With non-oil revenues less than 4% of GDP, debt repayments over time will crowd out other spending”, IIF concluded.

“Nigeria pays more on Eurobond than other African countries” By Julius Alagbe