ICM return in line with debt strategy

The Debt Management Office (DMO) has invited bids for the roles of joint lead managers and financial advisor for Eurobond issuance to raise US$1.0bn. The bids are due by 19 September, and the federal finance minister, Kemi Adeosun, had earlier said that she expected a launch in Q3 2016. The issuance is to form part of a US$4.5bn global medium-term note programme. It is consistent with the DMO’s strategy and intended to tap the favourable conditions in the international capital market (ICM).
The Debt Management Strategy 2016-19 has set a medium-term target of a 60/40 blend for the FGN’s domestic and external debt obligations. It put the blend at end-2015 at 84/16 although the subsequent effective devaluation will have pushed the ratio a little closer towards the target.

The DMO’s paper showed the weighted average interest rates for the FGN’s domestic and external obligations at 13.0% and 1.7% respectively. Domestic rates are higher but the differential also reflects the fact that ICM borrowings of US$1.5bn are the only element of the FGN’s external debt burden of US$10.7bn contracted on market terms. The balance is concessional.

The same point can be made from the 2016 budget, which projects FGN domestic and external debt service at N1.3trn and N54bn respectively.

Conditions for ICM borrowing by emerging market sovereigns have been improving since China-related fears eased in January and February. Buying surged in July, and has involved the big players.

An estimated 30% of global government bonds are trading at negative nominal yields so investors are chasing real returns. The macro story for the asset class (EM bonds) has not been transformed although there are some bright spots such as India,     the Czech Republic and Vietnam. As long as investors see US rate prospects as “lower for longer” and China is relatively incident-free, the rally should have legs.

Nigeria is not currently a bright spot but should enjoy the ride of the asset class as a whole. At the FGN’s non-deal roadshow in London in early June, investors liked Adeosun’s fiscal narrative but did not appear interested in mooted Eurobond issuance because of the then exchange-rate regime.

We trust that the change in that regime will also have smoothed the FGN’s talks with the World Bank and the African Development Bank on budget support. The 2016 budget projected the external component of budget deficit financing at N900bn (US$4.5bn at the time but currently US$2.9bn).

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