September 15, 2020 / 12:29 PM / By FBNQuest Research / Header Image Credit: FBNQuest
The latest data release by the DMO shows us that the FGN's domestic debt service totaled N313bn in Q2 2020, compared with the year-earlier figure of N215bn. The quarterly costs had stabilized but we can trace the increase to the semi-annual coupon payments on the 14.55% Apr '29s and the 14.80% Apr '49s that were issued in April 2019. Issuance continues to pick up because the DMO is required to raise N1.60trn (gross) from domestic sources towards the financing of the 2020 budget deficit, and because the monthly bond auctions are the largest source.
That budget projects domestic debt service payments of N1.87trn this year (excluding sinking fund transactions). The H1 figure of N920bn suggests that the projection is at best sound.
Falling rates obviously favour the FGN, and the outcome for the full year may still come in ahead of target. If we take a mid-curve bond such as the Mar '27s, we see that the average yield in the market has narrowed from 14.4% in Q2 2019 to 10.8% in Q2 2020. The decline over the same period for the 364-day NTB at auction has been far sharper, from 14.3% to 4.0%.
Analysts focus on debt service in Nigeria because of the pitiful record for revenue generation. The latest outturn (2019) gives us a ratio of 51.2% for total debt service/total inflows. The official projections show an improvement to 48.3% this year. The double blow of the Covid-19 virus and the plunging oil price will surely bring lower, not higher revenue collection.
FGN domestic debt service payments (N bn)
Sources: Debt Management Office (DMO); FBNQuest Capital Research
Domestic payments accounted for 79% of total debt service in 2019.
Despite this latest increase, the payments peak in the first and third quarters, when the issuance of FGN bonds is concentrated.