Public Debt Vulnerable to Exchange Rate Movements

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Monday, July 09, 2018 8:35AM/FSDH Research

Domestic Scene:

  • FSDH Research expects that the budget deficit financing activities of the Federal Government of Nigeria (FGN) may lead to an increase in yields in the domestic market from current levels. Corporates and governments may also soon start borrowing at higher interest rates from the domestic market
  • According to the Debt Management Office (DMO), Nigeria’s total public debt increased to N22.71trn in Q1 2018 from N12.60trn in Q4 2015. FSDH Research notes that the growth in the debt stock  is mainly driven by external debt and was accelerated by the devaluation of the Naira
  • FSDH Research analysis shows that the ratio of domestic interest payment to the FGN revenue from the Federation Account Allocation Committee (FAAC) stood at 79% as at Q1 2018.  We note that measures to grow the non-oil revenue will help to achieve and sustain a comfortable debt service to revenue ratio below 30%
  • The external sector of the Nigerian economy improved further in Q1 2018 as it recorded the best trade performance in the last nine quarters
  • FSDH Research estimates that Nigeria’s population may grow to 235 million in 2022, given the average growth rates in the population of the states of the federation between 2012 and 2016
  •  FSDH Research estimates that a total of 18 million Nigerians will be unemployed by 2022, compared with 15 million unemployed as at Q3 2017
  • FSDH Research expects the value of the Naira to remain stable in the short-to-medium term barring shocks to crude oil price and production
  • FSDH Research expects inflation rate to drop to 10.94% in the month of June 2018
  • Investors should take strategic positioning in the stocks that declare interim dividends. Some stocks in the consumer goods, building materials, petroleum marketing and banking sectors are attractive at their current prices
  • We expect that the yields on FGN Bonds may trend marginally higher in July to attract investors.

International Scene: 

  • The Federal Open Market Committee (FOMC) of the United States (US) Federal Reserve (The Fed) increased its anchor interest rate by 0.25% to 1.75%-2.00% in June 2018. We expect two more rate hikes in 2018,  possibly in September and December, as the fundamentals of the US economy improve
  • FSDH Research expects yields to continue to rise in the international market as monetary policy normalisation continues.

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