Persistent revenue shortfall counts against Nigeria

Eurobond at nine per cent shows high risk premium

Nigeria’s debt profile, expectedly, would notch up by $2.93 billion by the end of this week, with a mix of increased costs, courtesy of the ongoing Eurobond debt offering, which government earmarked for capital projects in the 2018 fiscal plan.This is coming barely seven weeks to the end of the constitutionally approved fiscal calendar, which has over the years been oscillating between April and June of every other year.

The new debt consists of $1.18 billion seven-year series; $1billion 12-year series; and $750 million 30-year series. The seven-year series is priced at 7.62 per cent; while the 12-year series would bear 8.75 per cent rate; and 30-year series has 9.25 per cent interest rate. All represents an increase in interest charges and consequent boost to debt service bill’s profile.

For example, Nigeria raised $3 billion Eurobond in 2017. The Notes comprise a $1.5 billion 10-year series and a $1.5 billion 30-year series. The 10-year series has a rate of 6.5 per cent, compared with a lower offer of $1.18 billion at shorter seven-year period now, but at 7.62 per cent.

Also, last year, while the 30-year series of $1.5 billion bears interest at a rate of 7.625 per cent, the latest bonds- 12-year and 30-year series, worth $1billion and $750 million are currently going for 8.75 per cent and 9.25 per cent respectively.The development shows how investors, both local and international currently perceive the country’s credit rating, going by the lingering low debt-to-revenue ratio.

Nigeria currently uses two-third of its revenue on debt-related obligations and can no longer fund capital expenditures without borrowing, thus taking the country to the “doorposts” of every perceived cheap lender.A financial analyst, Johnson Chukwu, said that borrowing at that rate is not market-friendly, especially when the claims of infrastructure investments in the country are subject of controversy.He said it is also a way of re-benchmarking foreign borrowing for corporate organisations, which borrow at lower rates at the international market.

According to him, the pricing is an indication that investors are demanding more for calculated risks associated with lending to Nigeria, particularly the ability to pay, given the revenue challenges.“It is also not a good one to borrow at nine per cent at the international market, with the declining foreign exchange reserves and uncertainty in the price of crude oil, beside the huge debt overhang,” he said.

The Managing Director of Afrinvest Securities Limited, Ayodeji Ebo, said that government’s local debt offering- Savings Bond, has severally failed to garner the expected interests over issues associated with the risk premium.“Investors are shunning the offering because of its structure, which has low premium compared to risk calculations. It has failed severally to gather the momentum typical of a bond in Nigeria,” he said.

The International Monetary Fund has repeatedly warned that the current fiscal challenge would affect the country’s ability to raise fund. Specifically, the Director of Africa Department, Abebe Selassie, at the recently concluded IMF/World Bank Group Meetings in Indonesia, predicted the outcome of the ongoing Eurobond, when he called for an improved revenue stream.

The Head of Research, at FSDH Merchant Bank, Ayodele Akinwuni, had earlier said that although the government has been able to meet its debt obligations (interest and principal payments) so far, the interest rate on government’s subsequent loans may increase because of the perceived elevated risk. Perhaps, this is the beginning.

The Coordinator of the Nigeria Network of Non-State Actors, Prince Chris Azor, said the country is now on auto mode of borrowing and concerns have risen on the actual investment of the proceeds.“There are issues on the ground and a lot that government is not telling the citizens. First, the country’s credit worthiness is fast eroding with the revenue crisis and falling reserves. The rising demand for interest charges on foreign loan is a pointer.

“The 2019 budget proposal is another pointer. The fall in the proposal is tactical denial of credit worthiness. We have just lost more in the ease of doing business. So, we cannot stop borrowing as it is now and the borrowed ones are not well prioritised,” he said.The country’s fiscal challenge has been long evolving into hydra-headed issue, with continuous deficit projections and the realisation of a wider deficit at the end of each budget calendar. For example in 2017, there was an actual deficit of N3.8 trillion, which was far from projection of about N2 trillion.

An analysis of the ratio of the interest payment on domestic debt in comparison with the Federal Government’s allocation from the Federal Account Allocation Committee (FAAC), showed that the government is spending too much of its revenue to pay interest on loans, with the principal still hanging.For example, there is a persistent significant increase in interest payment on domestic debt relative to government’s revenue from FAAC in the last three years.

In 2016, while the Federal Government earned N2.1 trillion from FAAC, it paid N1.24 trillion as interest rate on local debt. In 2017, it got N2.64 trillion allocation from FAAC, but spent N1.45 trillion; while in 2018, figures available showed that it has already paid out N931 billion in interest payment on domestic debt, out of N1.71 trillion allocation.This leaves the government with little resources to spend on critical sectors of the economy that could support strong growth and maintain a healthy economy to generate revenue. The current high interest payment relative to revenue is now increasing the credit risk of the country.

This would also lead to higher interest rates for private sector operators. It is important to note that the external environment is becoming tighter than before because of the rising interest rate in the United States.A further analysis of the country’s debt sojourn since 2013, showed that there has been a steady increase in the profile, with less than proportionate rise in revenue.

For example, in 2013, government revenue-to-total public debt was N8.9 trillion against N10 trillion debt; in 2014, the revenue shot up by N600 billion to N9.5 trillion, while debt profile rose by N1.2 trillion to N11.2 trillion.However, in 2015, while the debt increased by N1.4 trillion to N12.6 trillion, the government’s revenue base lost its steam by N2.3 trillion to settles at N7.2 trillion.

It was a dramatic turn in 2016, when the debt moved from N12.6 trillion to N17.4 trillion, while revenue plunged further to N5.7 trillion, from N7.2 trillion and eventually led to economic recession.In 2017, it was not better still, as the debt moved further to N21.7 trillion, with a marginal rise in revenue to N6.9 trillion compared to N4.3 trillion increase in debt.So far in 2018, debt profile is currently at N22.4 trillion, with revenue projections that have been widely criticized by analysts.

In this article:
Ayodeji EboJohnson Chukwu
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