Surge in domestic debt service

While we endorse the FGN’s expansionary fiscal stance, we caution that it has time limits in view of the sharp increase in domestic debt service. The 2017 budget proposals project total debt service of N1.66trn including a N177bn sinking fund for the retirements of bonds. This compares with N1.21trn for this year in the 2016-18 Medium Term Expenditure Framework (MTEF) and N1.36trn in the 2016 approved budget. This burden is almost entirely domestic: of the N1.36trn in last year’s budget, just N50bn was due to external creditors.

The projection for this year represents 33.6% of total FGN revenues. The most recent MTEF for 2017-19, which has been approved by the National Assembly, has total debt service rising to N1.93trn in 2019, equivalent to 35.5% of FGN revenues.

These projections may need to be revised upwards: this year’s budget deficit of N2.36trn is to be financed N1.25trn domestically, N1.07trn externally and N0.04trn from other sources.

The financing costs are sharply higher for domestic than for external debt. The yield on the July ’23 sovereign Eurobond is below 7% and almost ten percentage points less than FGN naira instruments of similar tenor. The cost of concessional debt, which dominates the external debt profile, is considerably lower. Even when we allow for another devaluation, the case for external borrowing is compelling.


Surge in domestic debt service Sources: Debt Management Office (DMO); FBNQuest Research

The current roadshow for the third issue of Eurobonds enables the FGN to share the story that it has a strong credit to sell. That said, most of its external borrowing plans are concessional, many financed by export credits. We would like to see more of the same, along with greater use of credit guarantees.

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