Nigeria is in dire need of foreign exchange. The plunge in crude oil prices created unprecedented dollar scarcity with adverse impact on the economy. But marginal relief is expected in January as the country enters the International Capital Market (ICM) to raise $1 billion Eurobonds. The positive outlook for crude oil prices in 2017 and attractive yield curve for emerging market papers make the offer attractive to savvy investors, writes COLLINS NWEZE.
Many Nigerians, especially the poor, viewed International Monetary Fund (IMF) Managing Director Christine Lagarde’s visit in January with suspicion.
For those above 40, who grew up to see the IMF as an economic monster spreading poverty through its ever-ready loans, such a visit was a reminder of the pains of the 1980s when the country borrowed from the Fund but failed to utilise it properly.
With a mountain of unpaid debts to service and repay following the oil price decline in the early 1980s, the IMF offered Nigeria financial assistance and debt rescheduling if the government agreed to a Structural Adjustment Programme (SAP). This included reducing the role of the state in the economy, cutting trade protectionism and devaluing the naira (then pegged at N1 to $1. Today’s official rate N306 to $1).
But as it tuned out, Lagarde’s coming was to strengthen relations between the IMF and Nigeria, as well as reinforce the partnership between both parties.
“I look forward to productive meetings with President Muhammadu Buhari and his colleagues as they address important economic challenges, most importantly the impact of low oil prices,” Lagarde said.
But the fears expressed by most Nigerians over her visit was a pointer to how badly borrowing is detested, with most of people preferring to suffer and die in silence than live in debts.
But that fear will fade in 2017 as the Federal Government tests its capital raising prowess in the International Capital Market (ICM) where it wants to borrow $1 billion via Eurobonds. The offer, fourth in a series, within six years, is expected to gauge the country’s standing in the eyes of global investors.
The worsening dollar scarcity makes this new borrowing plan imperative. Nigeria sold dollar bonds twice, the first was in 2011 when it raised $500 million through Eurobonds and subsequent two issuances in 2013 when it raised $1 billion of five- and 10-year debts to finance budget deficits.
The offers were highly successful. Today, Nigeria’s Eurobonds have gained 8.3 per cent, compared with the average of 9.6 per cent for high-yielding emerging-market sovereign dollar-debt. Yields on Nigeria’s existing dollar debt are almost twice as high as those for Kazakhstan and Colombia, two other developing-nation oil producers.
The floating of the Eurobond is part of the planned Federal Government’s Medium Term Note (FGMTN) Programme (2016 to 2018) and is expected to help the government bridge the N2.2 trillion deficit in this year’s N6.1 trillion budget.
A notice of request for proposal from Debt Management Office (DMO) said the purpose of the FGMTN programme was “to enable the Federal Government have the flexibility of quickly taking advantage of favourable market conditions in the ICM to raise funds, if and only when the need arises”.
The government had increased 2016 budget by 20 per cent, allocating one-third to infrastructural projects including roads, rail, ports and bridges. This, it believed, would stimulate the economy already battered by a drop in crude oil production/prices even as the International Monetary Fund (IMF) projected that the economy will contract by 1.7 per cent this year.
Debt Management Office’s (DMO’s) Head, Policy Strategy and Risk Management Joe Ugolala captures the benefits of using debts to fund infrastructure more succinctly. “If you want to build a railway from Lagos to Aba, there are two options. Firstly, you can save up the money for 10 years, before starting the project. The second option is to borrow and build the railway immediately, and within 10 years, generate enough revenues to offset the debt,” he said.
He sees the second option as more plausible as it captures the inherent benefits of borrowing to build infrastructure that is in the interest of the economy. Ugolala explained that for one to borrow, there must be that inherent capacity to repay, whether the debt came from internal or external sources. He explained that the Federal Government has the capacity to borrow from outside to fund budget, and support specific projects including infrastructure.
However, the significance of next year’s Eurobond (an international bond that is denominated in a currency different from that of the country where it is being issued) offer lies in the fact that it would be coming at a time the country is still facing three quarters of negative Gross Domestic Product (GDP) growth and experiencing one of its worst inflation and revenue drop in over a decade.
Afrinvest West Africa Plc Managing Director Ike Chioke said Eurobond issuances come at attractive rates relative to the domestic market and presently have many viable on-lending outlets.
Chioke, who spoke on the theme: “Navigating growth in a challenging environment” admitted the danger of potential pressure that may arise upon the payment of coupon on Eurobonds raised by the country adding that borrowers will require the dollar bi-annually to fulfill obligations to Eurobond holders.
Head Treasury, Ecobank of Nigeria, Olakunle Ezun, said the borrowing plan is a welcome development as the country has a lot of legroom to borrow within the external market. “If we are able to raise the fund, the dollar will be credited into the Central Bank of Nigeria (CBN) account, and subsequently added to the foreign reserves. The CBN will then print the naira equivalent of the inflow, and use it to support the 2016 budget implementation. The gain is that it will cost more for government to borrow that volume of cash locally. So, going for the Eurobond makes a lot of business sense for the economy,” he said.
Ezun said the advantage of this offer is that cash flows from gas and crude oil sales are generated in dollar and can quickly offset the debt. He said the January 2017 timing is right, because the economic prospect for the country is getting better and better, especially with the gradual recovery in crude oil prices to over $54 per barrel.
On the appointment of the financial advisers for the offer, he said the lenders are expected to do a book building and advise government on the offer rate after talking to prospective investors in the United States, United Kingdom, Asia, Europe among other regions on how much they would buy Nigerian Paper.
“This will be followed with allotment of offer, and eventual release of the money to the CBN. Going for offer above $1 billion will signal desperation, and raise the rate at which the offer will be listed. The repayment will not be a problem, because the country earns dollar, and will create a sinking fund where the coupon will be paid, and eventually the principal at the expiration of the offer,” he said.
But former Executive Director, Keystone Bank Limited, Richared Obire said the $1 billion Eurobond offer for next year seems unrealistic. “Quite frankly, I am skeptical about the offer. I do not know the information that government has that we do not have, and is emboldening them to go for the offer. Government has not put the right policies, especially the exchange rate in place, as we currently have between four and five exchange rates, which remain a big concern for prospective investors,” he said.
However, he admitted that the outlook for the economy and oil prices remains positive and an advantage which investors will be looking at. “Prospective investors will be looking at exchange rate stability, and policy directions that show enough seriousness that government wants to restructure the economy. It is obvious that the economy has worsened, compared to what it was when Largade visited Nigeria nearly in January,” he said.
He said that coupon rate of eight to nine per cent remains attractive to investors, adding that devaluing the naira was not a problem, but prospective investors want to be sure that the local exchange rate is stable at all times.
Obire said that government will be looking at accruals from crude oil and gas sales to repay the loan. “Investors are interested in the overall management of the economy because that will also determine the repayment possibilities. Nigeria’s country risk analysis by Fitch Ratings does not boost investors’ confidence but it can only get better,” he said.
Associate – Research, Eczellon Capital Limited, Mustapha Suberu, said that the government should focus more on external borrowing, and less on local borrowing insisting that the foreign debt is cheaper. He said that borrowing is not a bad idea, but must be used to fund infrastructure and raise the competiveness of the economy.
He also said there is need for adequate monitoring to ensure that borrowed funds were deployed to projects they were meant for.
DMO Director-General, Abraham Nwankwo said Nigeria’s low debt to GDP ratio means the country can borrow more to fund budget, infrastructure and other essential projects that will stimulate the economy and create jobs for the citizenry.
The DMO, he said, has raised the entire N1.18 trillion domestic component of the 2016 approved borrowing to fund the economy this fiscal year adding that by raising the entire domestic stock, “Nigeria has successfully developed a strong domestic market”.
He hinted that the “DMO is working to see that the $1 billion Eurobond is mobilised by second quarter of 2017”. “Nigeria is in a very strong position to service its debts because of our debt sustainability analysis, which ensures that we make sure that we do not go near threshold of borrowing and to avoid unsustainable debts, so we are operating miles away from the threshold,” Nwankwo said.
Regarding foreign debt, the strategy is to borrow on non-concessionary terms for projects with self-paying capacity and/or job creation potential, and on concessionary terms and grants for social sector projects.
The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo agreed with Nwankwo. He explained that with declining government revenues from oil, budgetary allocations alone may not be enough to finance the infrastructure deficit in the country.
Prof. Ekpo admitted that the debt option is still the most viable at this time. He said Nigeria’s rebased $510 billion GDP economy gives it more room to borrow more to bridge infrastructure gap.
For instance, Nigeria’s current available power generation capacity is about 2,000 megawatts, which is far less than the estimated demand of 10,000 to 12,000 megawatts. This has resulted in frequent and unpredictable load shedding and a heavy reliance on generators by consumers.
“With the current political will to tackle corruption and the desire to find a solution to the infrastructure problem in the country, there is need to channel fresh investments into power supply, roads, the railway and other social amenities,” he said.
Ekpo said these are not normal times, therefore, government has to borrow because the country is in recession. He said that Eurobonds, though costlier than funds from multilateral institutions, but is faster to get the cash out.
“If things were normal, one would advise against borrowing. But the Eurobonds are still better than domestic bonds, because of their tenor, which between five and 10 years. Although $1 billion Eurobonds at this time is not enough, but government needs it to build infrastructure, pay salaries in 28 states that owe their workers thereby stimulating demand,” he said.
On repayment plans, he said government can get the funds to pay subscribers or issue another Eurobonds when the bonds mature.
He believes that with the continued slide in government revenues from crude oil, its plan to provide tangible assets like housing, power (electricity), transport, education, communication, and technology, may be hampered by paucity of funds hence the need to key into the Eurobonds project.
Transaction parties emerge
The Federal Executive Council (FEC) last week, approved the appointment of transaction parties for the one billion dollars Eurobond to be issued next year. Minister of Finance Mrs. Kemi Adeosun broke the news after the Federal Executive Council (FEC) meeting listed the transaction parties as Citigroup, Standard Chartered Bank, Stanbic IBTC, Whiten case, Banwo and Ighodalo and Africa Practices Communications Advisers.
She said: “The $1 billion Eurobond programme is part of the funding for 2016 budget and we hope to be able to commence the process in January. We obtained certificate of no objection from the Bureau of Public Procurement (BPP) for the appointment of those parties, having undertaken full competitive open tender process.”
Adeosun went on: “We are confident that we will be able to complete the transaction expediently with significant interest. The oil price stability obviously is helping us. Currently, there is a bit of demand for emerging market papers.” “We’re looking at a maximum of $1 billion,” she said. “We need to go out and sell our story, talk to people, talk to the market – and get the best value,” Adeosun said adding that Nigeria’s paper is trading around eight per cent mark.
The minister added: “We are expecting to get quite a competitive pricing on the issuance programme, which I said, is to be used for the purpose of funding capital projects in the 2016 budget within the month of January. The other thing to note is that these parties that have been appointed would run any Eurobond issuance programme for the next three years so that we don’t have to keep on retendering, unless there is a major problem with any of them they will be our parties for the next three years.”
Debt servicing
According to the DMO, Nigeria expects to spend 35.32 per cent of its revenues servicing debt this year, up from 28.1 per cent for both federal and state governments in 2015. The two-year debt service ratios showed that of the N6.32 trillion combined revenues for state and federal government in 2015, only 28.1 per cent went to debt service in 2015. However, the figure will rise marginally to 35.32 per cent of N3.85 trillion revenue for the federal government alone, in this year’s Appropriation Bill.
Data from the DMO showed that the total external debt service payment for the year 2004 was $1.75 billion compared to $1.81 billion in 2003, reflecting a decrease of $0.054 billion or 3.01 per cent. The external debt service payments of $1.75 billion comprised of principal repayments of $1.17 billion, and interest payments and commitment charges of $0.589 billion.
Payments to the Paris Club creditors took the lion’s share amounting to $0.994 billion or 56.67 percent. The sum of $0.487 billion or 27.77 per cent was paid to multilateral institutions, $0.090 billion or 5.14 per cent to London Club, $0.171 billion or 9.76 percent to the Promissory Note holders and $0.012 billion or 0.66 per cent to non-Paris Club Bilateral creditors.
“The $1.75 billion debt service paid in 2004 is actually well below the debt service due for the year of $2.99 billion. This arises from the fact that Nigeria has not fully serviced its Paris Club debts, as an amount of $2.23 billion was due while only $0.99 billion was paid. The shortfall transforms into arrears and attracts severe penalty interest. This very process has contributed to the explosion in Nigeria’s external debt stock over the years,” the debt office said.
Debt profile
Nigeria’s total debt increased to N16.29 trillion as of June 30, 2016 ($65.42 billion) as against N12.60 trillion ($65.42 billion) as of December 2015.
DMO’s boss, Nwankwo, insisted that the country’s public debt-to-GDP remained sustainable despite the slump in crude oil prices. According to him, while other countries base their borrowing on debt- GDP ratio of 56 per cent, Nigeria will not exceed 19.39 per cent until 2017.
He said: “Our debt continues to be sustainable, despite all these volatilities in the ICM and the collapse of oil prices. However, it does not mean that Nigeria should go and sleep and hope that providence will continue to provide for them.”
He noted that the country has abundant resources in agriculture, solid minerals, Information Communications Technology (ICT), among others that offer ample opportunity for diversification of the economy to boost revenue.
Nwankwo stressed the need for Nigerians to face the reality that oil boom was over and may not reoccur anytime soon – by making wise decisions to invest in infrastructure, revamp agriculture, improve power supply and focus on the real sector. This, he said, will make the economy more productive and competitive.
The Chairman of the Committee, Adeyinka Ajayi, urged the DMO to come up with sustainable debt management models for the overall prosperity of the country. He noted that with the current stiff challenges facing the country as a result of the sharp decline in revenues from the sale of crude oil, the DMO is once again, expected to play a pivotal role in the effort to steer the economy out of trouble.
African Eurobond success stories
Nigeria is not alone in the Eurobonds race as many African countries have successfully raised cash from the ICM. This issuance of Eurobonds has gained momentum in recent years as countries seek to lock in favourable rates from the market.
For Nigeria, the successful issuances of three Nigerian Sovereign Eurobonds in the ICM, one in 2011 and two in 2013 – have opened the window for the private sector to raise required foreign currency funds. Local banks and other companies are now able to fund long-term real sector projects in agriculture, manufacturing, housing, mineral exploration and processing, infrastructure for diversified and sustainable economic growth, towards employment generation and poverty reduction.
Managing Director and Chief Economist, Global Research, Africa, Standard Chartered Bank, Razia Khan, said that 2013 saw record sovereign external debt issuance in Sub-Saharan Africa (SSA), with $6.6 billion of borrowing.
Year-to-date in 2016, this amount has already been surpassed. In most instances, the pricing – from the borrower’s perspective – exceeded even the more optimistic estimates.
For instance, Côte d’Ivoire issued a 10-year $750 million Eurobond at a yield of 5.625 per cent, despite its recent emergence from conflict and missed coupon payments as recently as 2011. Its Eurobond was more than six times oversubscribed.
Kenya came to the market with the largest-ever issuance size for a first-time borrower – a combined $2 billion – and pricing still beat expectations substantially. Since then, its debt has rallied further.
Ghana may have surprised the most. Despite ongoing concerns about its double-digit fiscal deficit, and mounting debt worries as the yield on its local-currency three month T-bill rose to over 25 per cent, its 2026 Eurobond was oversubscribed. While Ghana remains dependent on very short-term borrowing domestically, it was able to borrow $1 billion from international markets at 8.25 per cent.
Khan explained that while the market would be vulnerable to any change in Fed forward guidance, BoJ and ECB policy are likely to remain accommodative. “Although external borrowing costs are likely to increase as global liquidity conditions are tightened, we expect any re-pricing of African risk to be gradual. We see a continued structural allocation to Africa. Fundamentally, a robust long-term growth story underpins the increased interest in Africa’s markets,” she said.
“Despite expectations of increased funding costs, Africa’s external debt issuance is likely to continue. But in a less supportive global environment, we expect to see greater investor differentiation between credits. In this environment, economies with either better fundamentals or a more credible commitment to reform will benefit more. To date, there is little evidence of accelerated reform in anticipation of a more difficult external funding environment. This might still change, however,” she added.
Khan believes that Africa’s markets are becoming more correlated with other markets, increasing the risk of contagion when investors are pressured elsewhere, offsetting flows can have an important stabilising effect.
“Market discipline’ is seen as elusive. The ability to borrow from international markets has not generally caused countries to improve their economic management dramatically – even if they planned repeat issuance. Kenya’s headline inflation has been rising strongly, driven by food prices. In Nigeria, there has been much talk about the potential for easing. Despite officials’ plans to boost lending in Nigeria, there appears to be no predetermined route to further easing. Interest rates can only be reduced sustainably if policy credibility is not in question,” she said.
Head of Macroeconomic & Fixed Income Research, FBNQuest Gregory Kronsten said inventory accumulation, data-driven China worries and an uncompromising Saudi stance would hamper ongoing crude oil price recovery.
He hinted that crude oil price will end the year on a low note. He said although the oil price has picked up from its recent floor in January and the budget assumption of $38/barrel has started to look conservative, but the global supply/demand balance for crude is set to remain low until late 2017.
The thinking is that despite surprise mild recovery in crude oil price, borrowing is still needed because oil will remain low for a long time and may even crash below $50 per barrel in the face of rising oil politics.
Economy diversification is the answer
Nwankwo said with the drop in oil prices, government has no choice than to diversify the economy away from oil.
“There is still a broad resources base for diversifying and industrialising the economy. With appropriately structured financing, Nigeria should be able to programme a trajectory of long-term fiscal stability and self-sustaining growth,” he said.
He noted that to address the huge infrastructural deficit in the country, speedily and effectively, the funding implications for Nigeria is about $25 billion per annum over the next five to seven years.
The worry in the funding of such huge infrastructural challenge, the DMO boss said, lies in private sector equity and debt, which he explained is uncertain as well as public sector revenue and debt which has been adversely affected by declining oil revenue.
To address the imbalance, therefore, “the imperative is to depend on well structured, substantial, affordable, long-term external debt financing to fund the desired long-term economic change,” he stated.
Analysts think that how soon the expected economic turnaround happens will be dependent on the utilisation of the $1 billion Eurobonds, if and when they are secured.
