External Debt Service Under Control

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Friday, July 19, 2019   /09:18AM / By FBNQuest Research / Header Image Credit: Money 101

                                                                                      

Our chart shows payments to the FGN’s external creditors over the past six quarters. Those to creditors in the market (holders of Eurobonds, the small diaspora issue and the historic oil warrants) soared in Q3 2018 because the FGN chose not to refinance the US$500m 5.125% Eurobond that matured in July. We should note that the next maturity (a 6.75% issue) does not fall until 2021.                                 

Debt service to non-market creditors, bilateral and multilateral, increased to US$146m in Q1 2019 from US$59m the previous quarter due to principal repayments to Exim Bank of China, the World Bank Group and the African Development Bank among others.

The FGN/DMO policy of externalization (deploying Eurobond proceeds to pay down more expensive naira debt) has been vindicated by the subsequent history of debt service. The yield for investors on a mid-curve FGN bond is about 600bps higher than that for a comparable sovereign Eurobond. The differential is substantially higher when we take concessional loans in foreign currency (see below).

Based upon annual interest and fee payments in 2018, and the mid-year stock of debt, we estimate the average borrowing cost from the World Bank’s International Development Association at 0.9%, the African Development Bank at 1.4% and Exim Bank of China at 2.8%.


Total external debt service (FGN and states; US$ millions)

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

 

The FGN/DMO look to meet the external financing target of N825bn (US$2.7bn) in the 2019 budget from concessional sources rather than tapping the Eurobond market. In our view they could struggle due to the demands of policy conditionality.

 

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