The drop in the Federal Government’s revenue caused by the decline in oil prices has made it difficult for the government to meet up with its spending. However, the Debt Management Office (DMO) has risen to the challenge, issuing bonds to fund key projects to stimulate the economy and sustain growth. The successful raising of N10.791 billion through the Sovereign Green Bond aligned with the Federal Government’s new domestic borrowing plan meant to fund critical infrastructure, writes COLLINS NWEZE.
For Nigeria, the worst era seems over. That was January 2016 when crude oil price crashed to nearly $25 per barrel, with little hope that it would rebound. But the black gold has risen significantly, touching $64 per barrel last December 30, translating into a significant rise in government revenue.
For the government to meet its developmental goals, especially in funding key projects, which are capital intensive, it must borrow from both local and international markets. Hence, the Debt Management Office (DMO), last month, successfully raised N10.791 billion through the debut Sovereign Green Bond, which was offered to the public. The offer, which was oversubscribed, attracted banks, pension funds managers, asset managers and retail investors. The DMO had offered N10.69 billion Sovereign Green Bond for a tenor of five years and coupon of 13.48 per cent.
The DMO collaborated with the Federal Ministry of Environment and Chapel Hill Denham as Financial Advisers to make the offer a success. The Green Bond, which was rated ‘Excellent’ by Moody’s, was issued as part of the government’s New Domestic Borrowing in the 2017 Appropriation Act to finance the energising education programme, renewable energy micro utilities and afforestation programme.
“The DMO is pleased with the strong interest shown by investors,” and added that “it shows investors interest in new products and support for the objective behind the issuance of Bond, which is to invest in projects that will contribute to preserving the environment”. “It also shows support for the Paris Agreement on the Climate, which Nigeria has endorsed,” the debt agency said.
Its Director-General, Ms. Patience Oniha, said the agency will continue to roll out products that meet the needs of investors for their portfolio preferences even as it continues to take investment opportunities to the grassroots.
Oniha noted that the government will use the Green Bond proceeds to finance projects in the 2017 Appropriation Act that have been certified as Green because of their positive effects on the environment.
Oniha, assured 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, she said, ensured that the borrowings are both necessary and scrutinised before hand.
Ms. Oniha said:“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.”
She assumed the leadership of the DMO at a time the country was in dire need of economic stimulus and huge investment in infrastructure to boost the confidence of global investors in the economy.
The DMO boss was part of the success story the debt office achieved in the past 10 years. She retired as a director in the agency, served in the Efficiency Unit of the Ministry of Finance.
She was also part of the team that established 37 sub-national Debt Management Departments for the 36 states and the Federal Capital Territory (FCT), culminating in the construction of the first-ever comprehensive and reliable Domestic Debt Database for all the states and the FCT in 2012. Analysts said her track record of success has also translated to the huge subscriptions in the issuance of several government bonds under her watch.
A representative of the Department of Climate Change, Federal Ministry of Finance, Hajiya Halima Abubakar, explained that Nigeria is prone to coastal environmental hazards, which were part of the reasons President Muhammadu Buhari signed the Paris Agreement for a global response to environmental challenges facing the nation.
Abubakar said the Green Bond project have five priority areas that require funding. She listed the areas as agriculture forestry and land use, industry, oil and gas, power and transportation.
Responding to a question asked by one Bankole Ganiyu from Trust Fund Pensions on the servicing of the Green Bonds, the DMO boss said the bond will be serviced from the 2017 budget.
Funds from the Sovereign Green Bond will enable the government funds its deficits in a non-inflationary manner while providing benchmark yield-curve for pricing other securities/bonds. It also engenders rational management of government’s fiscal and monetary operations.
The Green Bond was issued following Nigeria’s endorsement of the Paris Agreement on Climate Change on September 21, 2016. The Paris Agreement was to strengthen the global response to the threat of climate change. Since the signing of the agreement, various countries that are parties to the agreement have initiated several steps aimed at making the environment better.
With the Green Bond Issuance, Nigeria is now one of the few countries in the world and indeed, the first African country to issue a Green Bond.
The infrastructure gap
The Africa Infrastructure Country Diagnostic (AICD) report for 2011 estimated that Nigeria required sustained spending of $14.2 billion per annum over the next decade in order to address the infrastructure challenge.
That pinpoints the huge funding requirement for present and future infrastructural development and its attendant impact on survival and growth of businesses in the country. Besides, traditional funding methods can no longer suffice as the traditional fund providers and various levels of government, do not have such resources at their disposal. Therefore, debts may simply be the solution to bridging the infrastructure funding gap.
Other bond offers
Aside the Green Bond, the DMO under Oniha, has also listed the $300 million Diaspora Bond and $3 billion Eurobonds on the Nigerian Stock Exchange (NSE) and Financial Market Dealers Quotation Over-the-Counter (FMDQ OTC) Securities Exchange respectively. Both offers were subscribed to the tune of $3.3 billion.
The $300 million Diaspora Bond, issued in June last year and the $3 billion Eurobonds also issued in November last year at the International Capital Market (ICM), were listed at the respective exchanges.
Both offers were issued with significant features with the $300 million Diaspora Bond unveiled with five- year tenor and 5.625 per cent coupon. The Eurobonds issuances came in two tranches of $1.5 billion 10-year offer with 6.50 per cent coupon and another $1.5 billion 30-year offer, priced at 7.625 per cent coupon.
According to the DMO, listing the $300 million Diaspora Bond and $3 billion Eurobonds on the NSE and FMDQ OTC will help increase the number and range of securities available in the domestic capital market. Such exercise, it added, would deepen the market and promote financial inclusion.
The exercise, the DMO added, will give more visibility to the domestic debt capital market, which will be beneficial for attracting capital from local and foreign investors.
Also, for the Eurobonds, which remains a sovereign security, the information it will provide, such as coupon, yield and tenor, will serve as benchmarks for corporates that may issue Eurobonds in the ICM.
The DMO also successfully raised N100 billion through non-interest bonds (Sukuk bonds). The positive outlook for crude oil prices in 2018 and attractive yield curve for emerging market papers have made the offers attractive to investors.
The floating of the Eurobond was part of the government’s Medium Term Note (FGMTN) programme (2016 to 2018) expected to help bridge budget deficits.
The DMO said the FGMTN programme gives government flexibility to take advantage of favourable market conditions in the ICM to raise funds, if and only when the need arises.
The DMO expressed its commitment towards meeting the needs of its diverse group of investors as well as supporting the development of the domestic capital market. It said the listing of the Diaspora Bond and the Eurobonds are examples of the various ways it exercises its borrowing powers on behalf of the Federal Government to support the development of the domestic capital market in particular.
The exercise, it added, would also create opportunities for the private sector to access long term funds in the domestic and international capital markets.
Financial pundits speak
Analysts and economists have continued to speak on the impact of buying FGN Bonds on the economy. Currencies Analyst, Ecobank Nigeria, Olakunle Ezun, said there is need for Nigerians to key into the government bond for infrastructure project by investing heavily in local bonds. He explained that the DMO works closely with the government to manage the national debts, adding that the government is regarded as the issuers of the bonds, while the buyers are seen as investors.
To him, although funds from the domestic bond market are more expensive than the international bond market, investing in the local bond market is in the best interest of the economy.
West African Institute for Financial and Economic Management (WAIFEM) Director-General, Prof. Akpan Ekpo, explained that with the declining revenue from oil, budgetary allocations alone may not be enough to finance the infrastructure deficit in the country.
For instance, the country’s current available power generation capacity is about 4,000 megawatts, which a far cry to 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. Ekpo said: “With the current political will to tackle corruption and the desire to find a solution to the infrastructure problem, there is need to channel fresh investments into power supply, roads, the railway and other social amenities.”
