Wednesday, June 22, 2016 8:54 AM / FBNQuest Research
The DMO has set a medium-term target of a 60/40 blend for the FGN’s domestic and external obligations in its Debt Management Strategy, 2016-19.
The blend as at end-2015 was 84/16. The target is unchanged from the previous strategy for 2012-15, and is driven by relative servicing costs and the DMO’s determination not to crowd out the private sector.
On the costs, the DMO shows the weighted average interest rates for domestic and external obligations at 13.00% and 1.74% respectively at end-2015. Naira rates are far higher than dollar rates.
More significantly, the difference in the weighted averages reflects the fact that the FGN’s external debt is predominantly contracted on concessional terms from the World Bank Group and the African Development Bank (AfDB). This burden amounted to US$10.73bn at end-2015, and the only substantial borrowings on market terms are Eurobonds totalling US$1.5bn.
The strategy was prepared before last week’s liberalisation of exchange-rate policy by the CBN. It shows the external and domestic debt of the FGN at 2.20% and 8.91% of nominal GDP respectively.
Adjusted for the spot rate after two days of the new policy in operation, the external element becomes 3.24% and the total burden 12.15%. Nigeria still compares very favourably with its peer group.
We floated yesterday the idea of a ratio for the total FGN debt stock as a percentage of formal sector GDP, the rationale being that the sector generates FGN revenues (from which debt service is paid) with a few exceptions (21 June 2016). We should say that the idea was not our own.
The 2016 budget projects net domestic and external borrowing of N940bn and N900bn respectively. A figure of N1.20trn for the domestic element in an earlier version was reduced for fear of crowding out.
For the external element, the federal finance ministry has suggested a possible Eurobond issue in Q3. We assume that it would be mostly concessional, and are waiting for news of the FGN’s negotiations with the World Bank and the AfDB.
That said, the 2016 budget itself has been overtaken by the liberalisation of exchange-rate policy.
The strategy does not cover state governments on the grounds that they take their own borrowing decisions. In a sense it has been overtaken by the FGN’s recent offer of N90bn in loans for the states in aggregate in return for restrictive conditions.