30 August 2017

Nigeria's External Debt May Hit N6.31 Trillion in 2018

Following the move by the federal government to issue foreign bonds to refinance maturing naira-denominated treasury bills, Nigeria's external debt has been estimated to increase by about 46per cent to N6.31 trillion ($20.6 billion) by the end of 2018.

PwC, a professional services firm stated this in a report in which it assessed the development.

The Federal Executive Council (FEC) recently approved a plan to issue $3 billion worth of foreign bonds of up to three years' maturity to refinance maturing naira-denominated treasury bills.

This decision was in line with the federal government's debt management strategy to rebalance its debt portfolio for domestic and foreign debt, from the current 69%:31% to a targeted 60%:40%.

Although the plan was yet to be approved by the National Assembly, PwC estimated that if implemented, it would have a modest impact on broad debt sustainability indicators.

"Although timelines are not clear, we suspect issuance is unlikely to be earlier than 2018, given the extensive preparatory work required in issuing international sovereign bonds.

"Consequently, we assume the impact on public debt ratios would become evident as from 2018. We estimate that Nigeria's stock of treasury bills would be around NGN3.8 trillion by end-2017.

"Refinancing $3 billion worth of maturing bills with dollar borrowing would result in a reduction in this stock by as much as nine per cent. External debt on the other hand would increase by about 46 per cent to N6.31 trillion ($20.6 billion) by end-2018," it added.

Under this scenario, the firm projected that debt to GDP would rise by three percentage points, from an estimated 16 per cent in 2017 to 19 per cent in 2018. Nonetheless, it stated that the impact on the cost of debt was likely to be muted.

The Debt Management Office (DMO) reports the weighted-average interest rate on debt which takes into account the proportion of instruments issued.

Treasury bills account for 16 per cent of total federal government debt, and the portion to be refinanced is about one-quarter of treasury bill maturities in 2018.

"Thus, we estimate the weighted average interest rate could increase to 13 per cent, in 2018 from an estimated 12 per cent in 2017 and 11 per cent in 2015.

"Our analysis of key debt sustainability indicators suggests that the probability of debt distress at this time is low.

"We define debt distress as a scenario which requires a country to: incur substantial arrears on external debt; receive debt relief; and receive non-concessional balance of payments support from the International Monetary Fund (IMF)," the report added.

Among the various indicators based on the level of debt stock, external debt to exports is cited as the most useful, as exports provide the basis for debt repayments.

Furthermore, PwC estimated that Nigeria's external debt to exports could rise by seven percentage points to 34 per cent in 2018.

This, they firm however said was well below the threshold of 100 per cent prescribed by the International Monetary Fund and the peak of 104 per cent recorded during Nigeria's debt crisis in 2004.

But devaluation in the currency would be a key risk to external debt sustainability, they stated.

"However, this risk is somewhat offset by the natural hedge provided by the high foreign currency composition of government revenues.

"Under a scenario of an export shock similar to the episode recorded in 2015, we assume a 44 per cent decline in exports in 2018. Following this, we estimate external debt to exports will rise sharply to 71 per cent, up from 27 per cent in 2017.

"While Nigeria's debt vulnerability worsens under this scenario, it still remains below the 100 per cent threshold level - at this level, Nigeria's external debt would need to reach $60.2 billion," the report added.

"While Nigeria's near term public debt ratios remain relatively comfortable, we are mindful of the trend in debt service ratios. We estimate that debt service to revenue ratio is likely to remain elevated at 50 per cent in 2018, breaching the recommended threshold of 25 per cent.

"This represents the fourth consecutive increase since 2015. Given the outlook for lower oil revenues, we expect the government to do more in mobilising non-oil revenues to bridge the fiscal deficit, to meet the objective of reducing the "crowding out" impact of domestic borrowing.

"There is room for tax mobilisation as Nigeria's non-oil tax to GDP at 2.3 per cent in 2016 remains well below the average of 16 per cent among sub-Saharan Africa countries.

"Similarly, the policy framework for investment incentives should be periodically assessed against intended policy objectives and revenue forgone. This would ensure that the investment incentive framework is targeted, cost effective and sustainable," it added.

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