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The better news on external debt

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Monday, June 12, 2017 9:47 AM /FBNQuest Research

In stark contrast to the challenging burden of its sovereign domestic debt service, the data for Nigeria’s external obligations are comforting. Total obligations at end-March amounted to US$13.81bn, equivalent to 3.4% of 2016 GDP.

The increase in Q1 amounted to US$2.4bn, consisting of Eurobond sales of US$1.5bn as well as higher borrowings of US$260m and US$600m from the World Bank and African Development Bank respectively. Q3 should bring another rise in market borrowings since the FGN is about to embark on a roadshow for its US$300m diaspora bond
.

This breakdown of additional external borrowings points to a rising burden of external debt service. Its cost, as we have often noted, is a fraction of that of servicing the FGN’s domestic debt.


Looking ahead, the FGN has plans to increase its external borrowings, subject to the go-ahead from the National Assembly: further Eurobond sales, the long-running talks with the World Bank on budget deficit financing and loans from China (including those for public agencies such as the NNPC, guaranteed by the FGN)
.

External debt service in Q1 2017 was US$130m. If we take the interest and fee payments of US$90m, we arrive at an annualised average interest rate of 2.6%.


The optimal blend of the FGN’s domestic/external debt obligations is 60/40 according to the DMO’s medium-term strategy. The ratio for the FGN at end-March was unchanged at 76/24.




However, the FGN’s fiscal strategy has the deficit largely covered by external financing with effect from next year. The likelihood of further exchange-rate adjustments also suggests a step towards the optimal blend
.

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