Narrower Rate Differential Favouring Eurobonds


Tuesday, February 11, 2020   /09:39 AM  / By FBNQuest Research / Header Image Credit: Daily Pakistan


The FGN's long-standing target of a 60/40 blend between its domestic and external obligations (and those of the states) is based in part on interest rate differentials. The ratio stood at 69/31 at end-September. The argument still holds although the differential in favour of Eurobonds vs FGN bonds in the mid-curve has narrowed from about 800bps three months ago to a little above 400bps. The CBN's latest heterodox decision to restrict access to its own open market operations (OMO) has driven the narrowing of the differential.


The compression of FGN bond yields has a little further to run in our view as domestic non-bank players redeploy the OMO maturities they can no longer reinvest. Thereafter we would expect to see some correction. Offshore investors and domestic banks can still hold OMO bills, and enjoy the returns.


The target blend does not cover non-market obligations, and we recall that 59% of the external debt stock is due to multilateral and bilateral creditors on concessionary terms (Good Morning Nigeria, 30 January 2020). 


Based upon annual interest and fee payments in the 12 months to September 2019 and the stock of debt as at end-March, we calculate the average borrowing cost from the World Bank Group at 1.1%, the African Development Bank Group at 2.0% and Exim Bank of China at 2.7%. For the FGN's commercial obligations, the average works out at 6.7%.


Non-market payments increased by US$140m from the previous quarter: half the increase was due to two large repayments of principal to the World Bank Group and Exim Bank of China.


Total external debt service (FGN and states; US$ millions)


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Sources: Debt Management Office (DMO); FBNQuest Capital Research



Total payments soared in Q3 2018 because of the maturity of a US$500m sovereign Eurobond that the FGN declined to refinance.


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