FGN debt strategy could benefit refineries

Nigeria’s fuel scarcity has eased, but not completely. The NNPC’s long term game plan is to boost domestic production via the state-owned refineries (Good Morning Nigeria, 09 January 2018). A major challenge successive governments have faced is funding the significant capex needs of the refineries. Case in point is the current refurbishment and turn around maintenance plan which we believe NNPC is giving priority. Private sector participation is a key to the puzzle. In the interim, the FGN’s debt strategy combined with rising oil prices and improved production provides NNPC with more flexibility.

The local media yesterday cited DMO commentary that the ratio for total debt service/total FGN revenue had stabilized at 34.0% at June 2017, compared with 33.9% at December 2016, much better than some estimates in circulation of more than 60%. More than 90% of the debt service was paid on domestic obligations.

From the 2018-2020 Medium Term Expenditure Framework and Fiscal Strategy Paper, we see total debt service excluding the sinking fund this year and next of N2.03trn and N2.37trn, equivalent to 35.9% and 37.5% of total FGN revenue.

If we annualise total domestic debt service payments in 9M 2017 of N1.40trn and take the mid-year stock of domestic debt of N12.03trn, we arrive at an average cost of borrowing of about 15.5%. From the auction results for FGN paper since end-August, we see yield compression of about 350bps for the bonds, and of between 80bps and 600bps for the NTBs (depending on the tenor).

We can therefore anticipate a rather lower burden this year than previously projected, and without making allowances for the programme of externalization (which itself generates savings due to the rate differentials).

We do not expect a retracement of rates to the levels of mid-2017. Based on current yield levels, we estimate a savings of, say, +/- N250bn as a result of the movement in yields. This could be channeled into some of the capex requirements for the refineries. One of the lessons that should be taken from the power sector is that – for the state-owned refineries in particular, JVs or part privatization may be a necessary first step. Notwithstanding, for the longer term, the debate over privatization of the refineries is a necessary one to have given the track record of the refineries after investments in the past.

One caveat worth highlighting, however, is the potential for savings to be lost in pre-election recurrent spending.

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