The Debt Management Office (DMO) approved a new medium-term debt management strategy (MTDS) for Nigeria last week. The MTDS is a policy document that guides the borrowing activities of a government in the medium-term, usually for four years; in this case, 2020 -2023. The MTDS was developed in collaboration with relevant stakeholders (Federal Ministry of Finance, Budget, and National Planning, Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), and the Office of the Accountant-General of the Federation). The MTDS reflects the current economic realities and the projected trends, particularly on the back of the effects of the COVID-19 pandemic.
For the 2020-2023 targets, the government has stretched its fiscal sustainability considerably. It has increased total debt as percentage of GDP to 40% from 25%. The new limit will accommodate new borrowings to fund budget deficits and other government obligations, including promissory notes to be issued to settle government arrears.
This ratio is still well below the World Bank/IMF's recommended threshold of 55% for countries in Nigeria's peer group.
The FGN's domestic debt burden amounted to NGN15.85trn (USD41.0bn) at end-Sep. '20. This is equivalent to 10% of 2019 GDP and includes NGN970bn in promissory notes issued to oil marketers, state governments, and other creditors. However, when we include public debt obligations that are not sovereign such as those of AMCON and the NNPC, state government debt and FGN external debt of USD32.0bn, the total burden could rise to 30% of GDP.
The 2020-2023 MTDS also points towards an adjustment to the portfolio composition with the domestic-external split set at 70:30. The initial proposed split following the approval of the FGN 2021 budget was 50/50. Meanwhile, the blend was 62/38 at end-Sep. '20.
The adjusted portfolio composition is not surprising. We do note that the federal finance minister had previously stated that the FGN will not issue Eurobonds if local financing is more favourable.
The new 70:30 ratio should further strengthen the domestic debt market and optimise access to both concessional and commercial sources of funding. As for external borrowing, concessional funding from multilateral and bilateral sources will be prioritised.
The DMO has opted for the usual heavy lifting by domestic institutional investors, of which the PFAs are the principal investors. Their holdings of FGN bonds amounted to NGN6.83trn at end-December, equivalent to 55.0% of their assets under management (AUM), according to the latest monthly report from their regulator (PenCom).
Although PFAs have grown their exposure to domestic equities in recent months, there are limited alternative investment outlets with which they are comfortable.
We expect FGN bonds' supply to rise, due to the financing of the huge deficit (with a proposed domestic borrowing of NGN2.34trn in 2021 compared with NGN1.66trn in 2020). Therefore, we see yields in the mid-curve in the 10-11% at year-end. This is our published view. However, we acknowledge that following this approval of the DMO's MTDS, yields could creep higher by as much as an extra 100bps.