Relax, don’t worry! Moderate debt risks, controlled ratios – Businessamlive
- Analysts tell Nigerians, investors
- But project a debt-to-GDP ratio of 35.5% for 2021
WWith growing protests from different shades of informed and uninformed observers of the Nigerian economy over the country’s growing debt profile, some investment analysts who have taken a critical look at the numbers have expressed mixed opinions on the stock of debt, with a positive rise in the price of oil, the country’s main source of foreign exchange; Foreign exchange liquidity problems; the reasons why international players in the international debt capital market are still exposed to certain risks as a result of the accommodative stance of the US Fed; and the relative stability of the Eurobond market.
Nigeria is now reveling in the euphoria of having lived through the 22 years since its return to democracy; and as he celebrates the transition to civilian rule, the next area of concern seems to come from the expansion of the public debt portfolio, which rose from 191 billion naira to 33.1 trillion naira by the end of the year. first quarter of 2021. The portfolio stood at 32.9 trillion naira in the last three months of 2020, according to the recent report from the Debt Management Office (DMO).
According to the DMO, the total outstanding public debt, which includes the outstanding debt of the Federal Government of Nigeria (FGN), 36 state governments and the Federal Capital Territory, Abuja, includes banknotes to order in the amount of N940.22 billion issued to settle arrears inherited from the FGN to state governments, oil marketing companies, exporters and local entrepreneurs. This is outside of what was achieved after President Muhammadu Buhari in May asked Nigerian lawmakers for approval to allow him to borrow $ 6.18 billion in foreign loans this year.
Currently Nigeria’s debt level stands at 21.7% of GDP, a figure that reassures policymakers and analysts as it remains below the 40% limit set by the DMO, while still being 23% below in sub-Saharan Africa by 58%. ; but this feeling of comfort is despite a projection that it will reach 35.5% of GDP by the end of 2021.
But CSL Securities analysts calling on the country’s current level of indebtedness relative to its debt-to-GDP ratio described it as a moderate risk of debt distress due to the low stock of foreign-denominated debt.
“While we note that the widening of the debt profile in the middle; (1) vulnerability of the economy to external shocks; (2) the inability of the government to effectively diversify its revenue base; and (3) the fragility of the economic recovery, could possibly raise concerns about fiscal sustainability; the low debt-to-GDP ratio of 23%, which remains well below the sub-Saharan African level of 58% and below the 40% limit set by the Debt Management Office, provides some comfort. We also see a moderate risk of debt distress mainly due to the low stock of debt denominated in foreign currencies, which masks the impact of the currency shock.
“That said, government interest payments continue to absorb a large portion of federal government revenue, making the otherwise low debt-to-GDP ratio very vulnerable to shocks. The total debt service-to-revenue ratio is currently estimated at around 70%. In addition, the external debt coverage for exports at 1.06x is worrying, as it is below the 5-year average of 2.2x, ”they noted.
In a commentary made available to Business AM, analysts at United Capital expressed a worrying point of view when they noted, “We believe that the federal government can no longer ignore the risk associated with the sustainability of the debt. More and more debt… ..where do we draw the line, ”they alarmingly said, claiming that the cost of servicing the federal government’s debt as a percentage of revenue is a fairer reflection of the government’s position. debt sustainability of the country.
A quick analysis of information from the DMO shows that Nigeria’s stock of domestic debt increased by 2.11 percent, from 20.2 trillion naira in December 2020 to 20.6 trillion naira as of March 31, 2021. However, FGN’s share of domestic debt Debt includes FGN bonds, Sukuk and green bonds, which have been used to finance infrastructure and other investment projects, as well as promissory notes of 940 , 22 billion naira.
Analysts from FBNQuest Capital Research, in their reactions, estimated that debt ratios remained under control, with domestic debt levels equivalent to 10.8% of GDP. They further noted that the stock-of-debt-to-GDP ratio would still compare very favorably with that of other peers in Nigeria’s emerging and frontier markets. For Kenya, the comparable figure at the end of 2020 was 67.8%. The mix was 38% external and 62% domestic at the end of March. For Kenya, it was 52% outside and 48% inside.
“Total public debt stood at 33,110 billion naira at the end of March, equivalent to 21.7% of GDP. This is the DMO’s measure of FGN and state government debt, both domestic and foreign. He set a cap on this measure of 40% of GDP, which leaves a borrowing margin of about 28 trillion naira. A broader measure would include bonds issued by AMCON held by CBN and bonds of NNPC and other public bodies. This would bring the burden to no more than 30 percent of GDP. We do not include the proposed conversion of FGN borrowings from the CBN through ways and means advances, which would total N10 trillion, into 30-year bonds. Upon conversion, the new instruments would be included in the public debt. In accordance with best practice, we also exclude OMO bonds, issued by the CBN for liquidity management purposes, and contingent liabilities such as sovereign guarantees, ”FBNQuest analysts said.
In the same vein, analysts at CSL Securities also noted that “the growth in outstanding public debt was mainly driven by domestic debt (62.3% of total debt) which increased by 2.11% quarter on quarter to 20.64 billion naira, after a decrease of 5.3 billion naira. percentage of quarterly increase in bond issues. We note that the total of bonds issued in the first quarter of 2021 was 1.6 times greater than the proposed issuance. This reflects public finances under pressure and partly explains the continued surge in bond yields. Conversely, external debt fell 1.9 percent quarter-on-quarter to 12.5 trillion naira or $ 32.9 million, mirroring the $ 500 million Eurobond which matured in January.
Another disaggregation of external debt valued at $ 32.86 billion showed that $ 17.83 billion of debt was multilateral; 4.18 billion dollars were bilateral from AFD (Agence Française de Développement), Exim Bank of China, JICA (of Japan), India and KFW, while 10.67 billion of dollars were commercial, comprising Eurobonds and Diaspora bonds and $ 0.18 billion in promissory notes.
The DMO appears to be pounding its chest as it says Nigeria’s issuance of the Eurobond has allowed it to diversify its funding sources as it managed to raise $ 10.67 billion in its first foray into the international market. capital to finance the implementation of federal budgets; and added that the $ 500 million Eurobond issued in January helped boost the country’s external reserves.