External Debt Service Still Manageable; Amounted to US$299m in Q2 2021


Wednesday, October 20, 2021 / 09:19 AM / by FBNQuest Research / Header Image Credit: DMO

The DMO's latest quarterly data release shows that the FGN's external debt service payments amounted to USD299m in Q2 '21, consisting of USD157m and USD142m to market and non-market creditors respectively. The amount is 4% higher on a y/y basis. However, as shown in the chart below, the external obligations are -70% lower on a q/q basis, largely because the FGN's payments to foreign creditors shot up sharply in Q1 '21, mostly due to the maturity of Nigeria's 6.75% USD500m Eurobond in January. An additional reason is that debt service payments tend to be elevated in Q1 and Q3 because the FGN's external debt issuances are concentrated in those quarters.


Nigeria's external financing burden appears to be manageable. Excluding principal repayments, interest and fee payments amounted to USD567m in H1 '21, implying an annualised average interest rate of 3.4%, compared with 10.7% for domestic loans.


The low single-digit interest rate reflects the fact that the external debt is skewed in favour of concessional loans from multilateral and bilateral lenders.


For instance, based on annual interest and fee payments in H1 '21, and the average stock of external debt as at end-Dec '20 and end-Jun 21, we calculate the average borrowing cost from the World Bank Group at 1.3%.

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In comparison, the FGN in September issued USD4bn in Eurobonds (7-year USD1.25bn, 12-year USD1.5bn, and 30-year USD1.25bn yielding 6.125%, 7.375%, and 8.25% respectively).


On the back of the Eurobond issue, the annual cost of external debt service is set to rise by c.USD260m.


Given the current difficulties with the naira exchange rate, an often-cited criticism against external borrowing is that the naira's devaluation adds to the debt payment burden. 


While acknowledging the criticism, we also recognise that a well-structured external loan mix skewed toward non-market (concessional) debt may prove to be less onerous than domestic market debt.


However, such concessional debt often come with conditionalities such as the implementation of institutional reforms.


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