Nigeria’s Debt Overhang: Relax, don’t worry! Debt risks moderate, ratios under control

• Analysts tell Nigerians‭, ‬investors
• But project Debt-to-GDP ratio of 35.5%‭ ‬for 2021

With growing outcries across different shades of informed and uninformed watchers of the Nigerian economy over the country’s rising debt profile, some investment analysts who have taken a critical look at the numbers, have expressed mixed views on the debt stockpile, especially on the back of a positive rally in the price of oil, the country’s main foreign exchange earner; FX liquidity concerns; the reasons international players within the international debt capital market are still up for some risks following the United States’ Fed’s dovish position; and the relative stability in the Eurobond market.

Nigeria today basks in the euphoria of having gone through all of 22 years since its return to democracy; and as it celebrates the transition to civil rule, the next area of concern appears to be coming from the widening public debt portfolio, which rose by N191 billion to N33.1 trillion as at the end of the first quarter of 2021. The portfolio stood at N32.9 trillion in the final three months of 2020, according to the recent report from the Debt Management Office (DMO).

According to the DMO, the total public debt stock, which comprises the debt stock of the Federal Government of Nigeria (FGN), 36 state governments and the Federal Capital Territory, Abuja, includes promissory notes in the sum of N940.22 billion issued to settle the inherited arrears of the FGN to state governments, oil marketing companies, exporters and local contractors.  This stands outside of what is obtained after President Muhammadu Buhari in May made a formal request to Nigeria’s lawmakers for approval to allow him borrow $6.18 billion in foreign loans this year.

Currently, Nigeria’s debt level is 21.7 percent of GDP, a figure that provides some comfort to policymakers and analysts, as remains below the 40 percent limit set by the DMO, as well as being 23 percent below the sub-Saharan Africa level of 58 percent; but this feeling of comfort is despite a projection that it will reach 35.5 percent of  GDP by the end of 2021.

But analysts at CSL Securities making a call on the country’s current debt level in relation to its debt-to-GDP ratio described it as a moderate risk of debt distress owing to the low stock of foreign-currency denominated debts.

“While we note that the widening debt profile amidst; (1) vulnerability of the economy to external shocks; (2) government’s inability to effectively diversify its revenue base; and (3) the frail economic recovery, could perhaps raise concerns over fiscal sustainability; the low debt to GDP ratio of 23% which remains significantly below the sub-Saharan Africa level of 58% and below the 40% limit set by the Debt Management Office gives some comfort. We also see a moderate risk of debt distress mainly due to the low stock of foreign currency-denominated debt, which masks the impact of exchange rate shock.

“That said, the government’s interest payments continue to absorb a large share of federal government revenues, making the otherwise low debt-to-GDP ratio highly vulnerable to shocks. The total debt service to revenue ratio is currently estimated at c.70%. Furthermore, the external debt to export cover at 1.06x is worrisome, as this is lower than the 5-year average of 2.2x,” they noted.

In a commentary note made available to Business A.M., United Capital analysts offered a worrying view when they noted thus: “We think the Federal Government can no longer ignore the associated debt sustainability risk. More and more debt…..where do we draw the line,” they stated alarmingly, positing that the federal government’s debt service cost as a percentage of revenue is a fairer reflection of the country’s debt sustainability position.

A cursory analysis of the information from the DMO shows that Nigeria’s domestic debt stock grew by 2.11 per cent from N20.21 trillion in December 2020 to print at N20.64 trillion as of March 31, 2021. However, the FGN’s share of the domestic debt includes FGN bonds, Sukuk and green bonds, which were used to finance infrastructure and other capital projects, as well as the N940.22 billion promissory notes.

FBNQuest Capital Research analysts, in their reactions, opined that the debt ratios still remain under control with the domestic debt levels standing equivalent to 10.8 percent of GDP. They noted further that the debt stock to GDP ratio would still compare very favourably with Nigeria’s other emerging and frontier markets peers. For Kenya, the comparable figure at end-2020 was 67.8 per cent. The mix was 38 per cent external and 62 per cent domestic at end-March. For Kenya, it was 52 per cent external and 48 per cent domestic.

“Total public debt amounted to N33.11 trillion at the end-March, equivalent to 21.7 percent of GDP. This is the DMO’s measure of FGN and state governments’ debt, both domestic and external. It has set a ceiling on this measure of 40 percent of GDP, which leaves borrowing headroom of about N28 trillion. A broader measure would include bonds issued by AMCON which are held by the CBN, and the obligations of the NNPC and other public agencies. This would bring the burden to no more than 30 percent of GDP. We are not including the proposed conversion of the FGN’s borrowings from the CBN by ways and means advances, said to total N10 trillion, into 30-year bonds. On conversion, the new instruments would be included in public debt. In line with best practice, we also exclude OMO bills, issued by the CBN for purposes of liquidity management, and contingent liabilities such as sovereign guarantees,” said FBNQuest analysts.

In the same vein, CSL Securities analysts also noted that, “The growth in the public debt stock was mainly driven by domestic debt (62.3% of total debt) which increased by 2.11 percent quarter on quarter to N20.64 billion, following a 5.3 percent quarter on quarter increase in bond issuance. We note that the total bond issued in Q1 2021 was 1.6x higher than the proposed issuance. This reflects the pressured government finances and partly explains the continued soaring bond yields. Conversely, external debt dipped by 1.9 percent quarter on quarter to N12.5 trillion or $32.9 million, reflecting the $500 million Eurobond which matured in January.”

A further disaggregation of foreign debt worth $32.86 billion showed that $17.83 billion of the debt was multilateral; $4.18 billion was bilateral from the AFD (Agence Francaise de Development), Exim Bank of China, JICA (of Japan), India, and KFW, while $10.67 billion was commercial, comprising of Eurobonds and Diaspora bonds and $0.18 billion in promissory notes.

The DMO appears to beat its chest by stating that Nigeria’s issuance of the Eurobond enabled it to diversify its funding sources as it successfully raised $10.67 billion from its first foray into the international capital market to finance the implementation of the federal budgets; and added that the $500 million Eurobond issued in January contributed to the accretion of the country’s external reserves.