Another string to the DMO’s bow

The local media has reported the sale of Nigeria’s first diaspora bond on the international capital market. The US$300m issue has a tenor of five years and pays a coupon of 5.625%. It was approved both by the SEC in the US and the UK Listing Authority. Final subscriptions amounted to about 130% of the offer. The issue had been on the drawing board for a few years. However, the marketing channels have now been opened and the Debt Management Office (DMO) has a formula that can be repeated.

The diaspora bond issue follows sales of Eurobonds this year to raise US$1.5bn. The 2017 budget has an external financing target of N1.07trn or US$3.5bn at the assumed exchange rate of N305 per US dollar.

It would appear that the DMO has already raised more than half the target for the year. However, the approved 2016 budget projected external financing of N640bn or US$3.2bn at the assumed rate of N197. That rate was, of course, liberalized in June. The only financing secured in 2016 was a disbursement of US$600m by the African Development Bank. The authorities may consider the 2016 deficit financing chapter closed since the stock of outstanding FGN bonds last year increased by as much as N2.22trn.

This success in tapping the commercial market does not spare the FGN the ordeal of talks with the multilaterals. Borrowing from the IMF is unacceptable politically to a Nigerian government but the FGN needs to persuade the World Bank to disburse a budget loan. Whatever the sticking point, the exchange-rate regime perhaps, the authorities need to reach an agreement.

The growth in borrowing at commercial rates obviously brings increased servicing costs. However, we are talking of an increase from a low base. Our calculations suggest average FGN borrowing costs in 2016 of 2.1% for external obligations and 11.6% for domestic. (The latter will have since risen dramatically.)

Projections by Fitch in its latest full rating report from March this year flag up the strength of Nigeria’s external balance sheet. It sees gross general government debt/GDP rising from 17.4% last year to 26.2% in 2026. Its sensitivity analysis of public debt points to a ratio above a still manageable 30% if the FGN is unable to reduce its primary budget deficit or suffers a rise of 250 bps in its servicing costs.

The DMO has other initiatives in play to diversify funding sources. It is selling FGN savings bonds to retail, albeit with a slow start, and, together with the SEC in Abuja, is preparing for the country’s first sukuk (Islamic bond) in local currency.

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