Wednesday, June 17,
2020 / 09:59 AM / by FBNQuest Research / Header Image
Credit: South China Morning Post
The indebtedness of African governments has, not surprisingly, been rising since the application of official debt relief in the late 1990s and early 2000s. In isolated cases such as Mozambique, Zambia and Ghana, the debt burden (as a percentage of GDP) is now higher than it was pre-relief. Of course, there are more than 50 separate stories within Africa and, as we have noticed over the years, the tendency to lump them all together becomes irresistible for many analysts and lobbying groups at times of downturn. Our interest is to set out Nigeria's predicament.
Because the virus and governments' response to it has brought sharp falls in output and revenue collection, there is naturally an increased focus on debt dynamics. The Nigeria debt story has several weaknesses, most of all the modest collection of taxes, but is better than most in our view.
To start with the weakest link, the Jubilee Debt Campaign has calculated that the external debt service/total revenue ratio has worsened by a factor of three in the past decade to an African average of 13%.
Data from the Budget Office of the Federation for 9M 2019 gives a ratio of 11% for the FGN. However, if we recalculate the ratio for total debt service, we arrive at an alarming figure of 59%. The position will almost certainly have deteriorated this year because revenue is being squeezed.
Gross federally collected revenue amounted to 7.5% of GDP in 2018 and 7.1% last year. For an oil producer and emerging economy on Nigeria's scale, the proportion should be closer to 20%. The collection agencies have challenges with both coverage and compliance. The turnaround will be slow.
The G20's offer of the deferment of all bilateral debt service due by end-2020 might seem a good starting point. However, the total bill paid to these creditors by the FGN in 2019 was less than US$180m. Accepting the offer, as twelve other governments have done to date, could bring private creditors into the process on the basis of comparable treatment. This, in turn, could well have implications for sovereign ratings and access to the Eurobond market.
The FGN may have ruled out returning to this market this year. That said, several EMs have tapped the market in recent weeks and come away with good pricing. Egypt raised US$5bn in May and could have raised US$15bn. Let's not forget that the FGN has a US$500m Eurobond maturing in January.
Another major positive in the Nigeria debt story is the strength of domestic institutional investors. This is proving invaluable as the Debt Management Office has a target to raise N1.60trn (US$4.1bn) for 2020 budget financing. The CBN helped to push down borrowing costs and boost demand for FGN paper by shutting the PFAs out of the trade in its own OMO bills in October.