Another Mark of Debt Externalisation

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Wednesday, August 22, 2018 10:09 AM / FBNQuest Research                                                                                          

The FGN’s domestic debt stock amounted to N12.15trn (US$39.7bn) at end-June, equivalent to 10.7% of 2017 GDP. The decline of N430bn in Q2 is the latest consequence of the FGN policy of “externalisation” of its debt obligations (the deployment of Eurobond proceeds to pay down naira-denominated paper).

The DMO has reported that it redeemed NTBs totaling N640bn in H1 2018. Its medium-term target is a 60/40 split between the domestic and external components of public debt (FGN and states combined).                                                                                           

The mix stood at 70/30 at end-June, compared with 73/27 at end-December. The policy is designed to take advantage of the interest rate differential favouring external issuance. The normalization of US monetary policy works against the strategy to some extent. However, we note that Nigeria and other EM issuers have benefited from the exclusion of new Russian sovereign and corporate paper from the market due to sanctions.

The DMO’s strategy is also designed to counter “crowding out”. The CBN data for Q2 2018, however, show credit to the private sector of N22.3trn (US$73bn), representing a decline of 0.7% q/q (and a rise of 1.3% y/y).

The headline ratio of 10.7% of GDP becomes 19.7% for total public debt (ie FGN and states, domestic and external). If we broaden the measure to include public agencies and contractor obligations, we would arrive around a highly respectable 30% of GDP. 

 

FGN domestic debt (N trn)

 

Proshare Nigeria Pvt. Ltd.

 

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

 

It is sometimes said that the debt/GDP ratio has limited relevance because debt obligations are serviced by the government and not the broader economy (whatever its size). The ratio is popular with ratings agencies, potential bondholders and the financial media, however.

 

Proshare Nigeria Pvt. Ltd.


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