Headroom Within the New Debt Ceiling - FBNQuest


Thursday, September 23, 2021 / 11:50 AM / by FBNQuest Research / Header Image Credit: iStock


The FGN's domestic debt increased by 14% y/y to NGN17.63trn at end-June as the authorities rushed to finance their fast-growing deficit, mostly with the sale of bonds at the monthly auctions. In contrast, the stock of pro-notes declined from NGN940bn at end-March to NGN795bn in mid-July according to an update released by the DMO. Maturities are coming faster than new issuance, and amount to a cumulative NGN570bn to date. The first issues were almost three years ago, leading us to wonder whether the total will ever reach the maximum NGN2.70trn that was aired at the outset. It may be that the dual verification of all claims is proving a deterrent. Our chart highlights the original creditor categories because the pro-notes are tradeable debt instruments and have often been sold into the market. For a state government under fiscal pressure, for example, the case is surely compelling.


Now that the ceiling for public debt has been raised from 25% to 40% of GDP, there is plenty of headroom for further securitization of the FGN's domestic arrears. The ratio at end-2020 for this measure, which consists of the domestic and external obligations of the FGN and state governments, was 21.6%.


On the basis of 2020 GDP and the actual debt burden, the headroom was then about NGN28trn (currently USD67bn). We must make allowances for this week's USD4bn Eurobond issuance.


A much larger potential addition is the mooted securitization of the FGN's ways and means advances from the CBN. These were estimated in late 2020 at NGN10trn by the DMO.


A quick look at the Budget Office reports suggests that the unauthorized borrowing of the FGN in 2017-202o reached NGN11trn. We should also recognize the strong possibility of an overshoot on the projected deficit this year, given the very ambitious revenue target and the signals from the office that it does not plan to cut back spending in the 2021 budget.


The headroom is plentiful and increases each year in line with nominal GDP. The challenge is not to find investors who will take Nigeria risk. We need look no further than the foreign portfolio investors for the Eurobonds and the PFAs for the FGN naira bonds.


The challenge is to make productive use of borrowed funds. Nigeria is lightly borrowed in an EM context when compared with its peers and has an opportunity to use the headroom and beyond for its transformative agenda for the economy.


FGN pro-notes outstanding by creditor category (Jul '21; % shares)                             

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

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