We extend our commentary on the DMO’s data release for Q3 2018 with a look at the weak point of the narrative, the FGN’s domestic debt service. The latest report shows that payments, having increased steadily for three years, have settled on a plateau. A rise in obligations on FGN bonds was balanced by a fall in interest paid on NTBs, a reward for “externalization”.
The chart shows that the payments on FGN bonds peak in the first and third quarters. A close scrutiny of the data reveals that the six largest bond issues were launched in these two quarters.
The weakness has arisen because debt service, of which more than 80% is due on the FGN’s domestic obligations, has grown more rapidly than revenue generation. Based upon a report by the OAGF and the Budget Office of the Federation, we find that total debt service accounted for 44.5% of the FGN’s total inflows (retained revenue and assorted extra categories) in 2016, and 62.6% in 2017.
The 2018 budget, signed off in June, projects a ratio of just 28.1% for total debt service/FGN revenue. The figure of N2.01trn for debt service looks plausible in the light of the DMO’s latest data and our understanding that yields remain below the assumed levels for FGN bonds and NTBs in the budget.
FGN domestic debt service payments (N bn)
Sources: Debt Management Office (DMO); FBNQuest Capital Research
We are rather less comfortable with the N7.17trn projection for total FGN revenue. However, we should mention the statement by Babatunde Fowler, the chairman of the Federal Inland Revenue Service, that its collections in 2018 (calendar year) had reached a record N5.0trn as of the second week of December.