Nigeria’s Total Public Debts More than N50 Trillion, Analysts Estimate
As Nigeria engages in borrowings spree, total debt has already outpaced the N50 trillion mark, according to analysts estimate in reaction to the recent $4 Eurobond raise.
Detail from the medium-term expenditure framework approved by lawmakers has again indicated that Nigeria will borrow about N5 trillion to support the 2022 budget. The breakdown of the approved appropriation bill showed that FG is targeting a marginal increase in revenue of N8.36 trillion when compared to N7.89 trillion revenue target in 2021.
Cowry Asset said in a report that this result in a budget deficit of N5.6 trillion (a little lower than N5.71 trillion recorded in the fiscal year 2021), part of which would be financed by N4.89 trillion borrowings – inclusive of both foreign and domestic debts.
In the first half of 2021, Debt Management Office reported that total public debts printed at N33.107 trillion, and this has expanded to more than N35 trillion as off second quarter, according to DMO Director-General, Patience Oniha at a virtual meeting.
In a macroeconomic note that follows the Eurobond issuance, CardinalStone estimate that non-DMO debt which includes AMCON exposure, net liabilities to the CBN, claims on states and local government by the apex bank and estimated power sector tariff shortfall totalled N15.749 trillion.
Analysts’ breakdown put AMCON debt at N4.4 trillion, in addition to about N8.6 trillion net liabilities to the CBN, N610 billion claim on states and local government by the CBN and N2.18 trillion estimated power sector tariff shortfall.
Explaining the implication of the $4 billion raised from the international debts market on the naira and the fiscal position of Nigerian government, CardinalStone estimates put total public exposures as a proportion of Nigeria’s gross domestic product (GDP) at 34.2% in the first quarter.
This raised total public debt to N48.857 trillion as of the first quarter of 2021, according to analysts estimates, before Federal Government accessed another $4 trillion from $6.18 billion foreign currency loans approved by the lawmakers to support the 2021 budget deficit.
The investment firm recalls that Nigeria successfully accessed the international capital market on Tuesday, issuing $4.0 billion in Eurobonds. Following the global investors calls conducted, DMO announced that the issuance was spread across three tenors, $1.25 billion on the 7-year, $1.5 billion on the 12-year and $1.25 billion on the 30-year instrument, with respective yields at 6.125%, 7.7375% and 8.250%.
Nigeria’s debt office said the total subscription was $12.2 billion, implying a bid-to-cover of 4.1x.
“This was unsurprising to us, given the cumulative effect of the high global stock of negative-yielding debt, elevated global liquidity, and Nigeria’s moderate-to-low risk of debt distress”, CardinalStone said.
Explaining the implications of the Eurobond raise on the local currency and fiscal position, CardinalStone said CBN is unlikely to ramp up intervention to pre-pandemic levels in the near term.
Analysts at the firm noted that since the start of the year, the FX liquidity crunch has intensified due to low intervention by the CBN and weak portfolio inflows. To the first point, CBN’s current monthly intervention in the FX market is likely below $1.8 billion, which is 1.7x; lower than the average for Q1-2020”, CardinalStone stated.
The firm remarked that this mainly reflects the impact of OPEC+’s cap on crude oil production and persistent challenges at various oil terminals, which has largely masked pass-through from higher oil prices.
Analysts also highlighted the plunge in capital importation to a 22-quarter low of $876 million in Q2-2021 compare with $1.2 billion in Q2-2020.
“These factors may have driven down average turnover in the Investors and Exporters foreign exchange Window to $108.7 million in 2021 from $345.0 million in Q1-2020”, it said.
CardinalStone said despite the Eurobond issuance, the CBN’s body language suggests that it is unlikely to ramp up intervention sales to pre-pandemic levels in the near term.
“Our view is premised on the ongoing FX rationing -with the suspension of BDCs sales in July- existing FPI backlogs, and the un-repatriated dividend of foreign equity holders.
“In any case, the Eurobond liquidity is equivalent to just 1.7 months of intervention sales, assuming CBN’s pre-pandemic monthly FX supply of $2.3 billion, all else equal. Foreign investors may need more convincing”, analysts explained.
CardinalStone expressed a view that while inflow from Eurobond is essential, it may not be enough to drive a material resurgence of capital inflows to the country in isolation.
“We believe that foreign investors may need better convincing before making big bets. Thus, the issue of outstanding dollar demand backlogs would need to be addressed, and the overall FX liquidity framework will need to be improved to enhance investors’ confidence”.
In addition, the investment firm said in the report that foreign investors may require an improved carry trade that better reflects the Nigeria risk environment, especially given the forthcoming pre-election uncertainties of 2022. The point on possible pre-election year risk is supported by the average capital importation contraction of 27.0% in two of the last three pre-elections years, according to analysts.
The report also maintained that the exchange rate in the parallel market premium will remain widened. Following the halt in FX sales to the BDCs, the Naira has taken a turn for the worse at the parallel market, trading at a premium of 38% versus 21.2% at the start of the year.
“This trend will likely persist as corporates and individuals who import items restricted by the CBN will continue to source FX from the black market. Our base case expectation is for the premium to remain elevated, save for a material increase in FX supply via other channels”.
Despite the rising debt concerns in Nigeria, analysts said the country still maintains a low risk of debt distress due to the low stock of foreign currency-denominated debts, which has masked the impact of exchange rate shocks.
Nigeria’s total public debt (DMO and non-DMO) is estimated at 34.2% of GDP, lower than most SSA peers – Ghana (76.7% of GDP) and Kenya (66.5% of GDP).
Nonetheless, CardinalStone insists that total public debt remains a concern, given that it absorbs a significant portion of federal government revenues service (98.0%) and results in materially low fiscal space.
“We assess that the current FX reserve buffers – including the newly issued Eurobond- appear sufficient to cover the total external debt service requirements and imports for about 3 months.
“Also, at 270.0%, Nigeria’s short-term external debt coverage is well above the IMF threshold of 100.0%”, CardinalStone said.
Nigeria’s Eurobond repayments are not expected to peak until 2027/2028 as the current schedule does not include more than one maturity repayment per year which analysts say looks relatively comfortable in the context of current FX reserves realities.
Nigeria’s Total Public Debts More than N50 Trillion, Analysts Estimate