•DG says offer oversubscribed by 400 per cent
The Federal Government plans to use the proceeds of the $3 billion Eurobond Offer it issued in two tranches of $1.5 billion for 15 years and $1.5 billion for 30 years to refinane domestic debts. The offer, issued through the Debt Management Office (DMO), was oversubscribed by 400 per cent. In this report by COLLINS NWEZE, the DMO Director-General, Ms. Patience Oniha, explains the government’s debt management strategy and the envisaged impact of the offer on the economy. THERE were high expectations within the International Capital Market (ICM) when the Federal Government announced plans to raise $5.5 billion with the backing of the Debt Management Office (DMO).
In line with the government’s debt management strategy, the $5.5 billion has two components. The first – $2.5 billion to part-finance the 2017 Appropriation Act deficit and $3 billion Eurobond to be borrowed from external sources and proceeds targeted at repaying maturing domestic debt obligations.
So, when the $3 billion Eurobond offer eventually came and was oversubscribed by 400 per cent, the DMO Director-General, Ms. Patience Oniha attributed the success to foreign investors’ appetite for Federal Government’s instruments. The DMO chief, who oversaw the successful issuance of the country’s first Sovereign Sukuk of N100 billion, also gave further details.
On plans to raise $5.5 billion from the international financial markets, Ms. Oniha explained the federal government’s strategy.
She said: “The DMO had for several years raised funds for the government largely in the domestic market through FGN Bonds and Nigerian Treasury Bills, and to a limited extent, from external sources mainly the multilaterals.
“While this had a beneficial effect of developing the domestic debt capital market, the government became the dominant issuer to the extent that it has been regularly accused of crowding out the private sector.
“The outcome was obviously not intentional, but to remedy the situation. The DMO deemed it fit to shift some of the borrowing activities to the international financial markets. This is also in line with its debt management strategy of achieving a portfolio mix of 60 per cent domestic and 40 per cent external.
“Through the strategy, the share of domestic debt has been brought down from over 85 per cent to 77 per cent as at September this year.”
Giving insights into the components the DMO director0general said: “The $5.5 billion is made up of two components, the first of which is $2.5 billion to part-finance the deficit in the 2017 Appropriation Act. The 2017 Appropriation Act included new borrowings of N1.254 trillion from the domestic market and N1.068 trillion equivalent of about $3 billion from external sources.
“As at October 2017, only $300 million in the form of a Diaspora Bond had been raised leaving an unfunded balance of $3.2 billion. The other component of the $5.5 billion external capital raising is the $3 billion whose proceeds are to be used to repay some maturing domestic debt obligations.”
Speaking on the benefits expected from borrowings, she said: “The DMO’s role in financing budget deficits as provided in Annual Appropriation Acts, are to support budget implementation and the attainment of the government’s economic targets. The $2.5 billion is specifically targeted at fulfilling the DMO’s mandate in this regard.
“On the $3 billion for refinancing domestic debt, there are several benefits for the action. Firstly, it will reduce the crowding out effect that I earlier referred to thereby creating more space for other borrowers in the domestic market.
“It also has the potential to bring about a reduction in lending rates which would make the cost of production of goods and services by the private sector cheaper and more price-competitive.
“Another major benefit of raising external capital is a lower cost of borrowing to government and a moderation in debt service costs. As you know, United States (U.S.) dollar interest rates are much lower than naira interest rates. The $1.5 billion 10-year and $1.5 billion 30-year Eurobonds were issued at coupons of 6.5 per cent and 7.625 per cent per annum respectively.
“These coupons are certainly much lower than the 15 per cent to 17 per cent that the government borrows at in the domestic market for shorter tenured funds. There is also the fact that the $3 billion is a direct accretion to Nigeria’s external reserves which are extremely useful for managing the naira exchange rate.”
Ms. Oniha explained what accounted for the over-subscription of the Eurobonds by over $11 billion (about 400 per cent of the $3 billion that the government took) and her agency accepted less than the $5.5 billion approved by the National Assembly.
Her words: “The demand of over $11 billion from international investors is a demonstration of their confidence in the policies and reform initiatives of President Muhammadu Buhari as well as the economic outlook of Nigeria.
“Like those investors, we ourselves can attest to the economic improvements in Nigeria as demonstrated by higher external reserves, stable exchange rate, Gross Domestic Product (GDP) growth of 1.44 per cent in the third quarter of 2017 and improvement in the Ease of Doing Business.
“Our intention was not to raise the $5.5 billion at once. Our first priority was to raise the $2.5 billion required for the 2017 budget while the $3 billion required for refinancing domestic debt will be in a phased manner.
“Also, from a technical perspective, we still wanted to moderate the cost even in the International Capital Market by managing the supply of Nigeria’s Eurobonds in the market.”
On the significance of the 30-year Eurobond being issued for the first time in the country, she said: “It is remarkable that international investors were willing to take a long term risk on Nigeria by buying the 30-year Eurobond. This feat is even more remarkable when we consider that South Africa which has a superior sovereign rating of BB- compared to Nigeria’s B+/B rating is the only sub-Saharan country that has issued a 30-year bond in the International Capital Market.
“The other outstanding aspect of the 30-year Eurobond is its Pricing at 7.625 per cent which is lower than the coupon of 7.875 per cent on the $1.5 billion 15-year Eurobond issued earlier in the year.
“In terms of its specific benefits to Nigeria, it provides the appropriate funds for financing infrastructure which is typically long term while also reducing the refinancing risk of the debt stock.
“It will also serve as a benchmark for local and foreign institutions which may need to raise long term dollar funds to invest in Nigeria under various Private Public Partnership (PPP) arrangements for infrastructure as well as privatisation.”
She said the fresh borrowings from the International Capital Market will not anyway worsen the country’s debt burden.
The DMO chief said: “I want to re-assure Nigerians that the government’s borrowings are pre-approved by the executive and legislative arms of government and are used to finance various activities of the government as appropriated.
“These layers of approvals ensure that the borrowings are both necessary and scrutinised before the DMO embarks on actual borrowing. The increasing focus by the current administration of using borrowed funds for infrastructural development is a step in the right direction.
“As borrowing is deployed to infrastructure to promote economic growth, the benefits of job creation and increased production among benefits are good for all Nigerians.
“Besides, the debate on debt burden should therefore shift to actively supporting the government to increase revenue to levels comparable to the sub-Saharan average of 17 per cent of GDP. The other part of the argument about debt becoming a burden is the issue of Nigeria’s revenue base which at six per cent of GDP is not only low but well below that of peer countries.
“Interestingly, government’s revenue is now being given proper attention. The measures to increase revenues are already yielding some results, and as this trajectory continues, the need for borrowing is expected to reduce while debt service will become an increasingly smaller portion of revenue.”
