Nigeria to More Than Double Dollar Debt: It's Simple Math

Updated on
  • Nation pays average 16% on naira debt vs 6% for dollar bonds
  • Nigeria changing debt mix to increase portion of external debt

Why pay an average 16 percent for naira bonds when there’s a world of investors willing to accept 1,000 basis points less?

Nigeria’s Eurobonds yield an average 6 percent, which explains why Africa’s biggest economy is planning to raise as much as $5.5 billion in the next three months. That will more than double its outstanding dollar bonds to about $9 billion, which is still less than a third of the nation’s foreign currency reserves, according to data compiled by Bloomberg.

Read More: Nigeria Plans to Sell $5.5 Billion of Eurobonds by Year-End

It’s an opportune time for the government to sell dollar debt, with investors piling into emerging markets. Revenue in the first quarter was a third less than budgeted, central bank data show, and there’s $8 billion of debt including interest due in the next three months. Nigeria has another $23 billion due next year, which includes short-term bills issued by the central bank.

Debt servicing in 2016 doubled to 66 percent of revenue after the government collected only half of projected income, according to the International Monetary Fund.

Reducing the nation’s borrowing costs will free up more state funding as it seeks to spur growth to 7 percent and create 15 million jobs by 2020. Its economy shrank 1.6 percent in 2016 amid a slump in crude output and prices.

Currency Risk

The Eurobond sale “does lead to increased currency risks in the longer term, but in the short term it will actually bolster Nigeria’s reserves, which will create more confidence in the current naira exchange rate and the central bank’s ability to defend the currency,” said Cobus de Hart, an analyst at NKC African Economics in Paarl, South Africa.

Nigeria tightened currency controls soon after crude prices crashed in 2014. While the central bank has eased some restrictions this year -- including by creating a foreign-exchange window for investors in which the naira is meant to float freely -- the country is still stuck with import curbs and multiple exchange rates, with spreads stretching almost 20 percent.

Here is what some analysts and money managers have to say about the sale:

  • De Hart at NKC African Economics:
    • “The target of $5.5 billion in Eurobond issuances before year-end is very ambitious. That said, the general shift in the debt accumulation strategy toward more external debt is welcome”
    • “A stronger foreign currency buffer will open up more options for the central bank in terms of further steps to liberalize the foreign-currency framework as envisaged in the economic recovery and growth plan, as the apex bank will be in a stronger position to ward off speculative attacks.”
  • Joe Delvaux, a London-based senior fund manager at Duet Asset Management Ltd.:
    • “The government has been talking about changing the debt mix to increase foreign debt to 40 percent, but the size surprised us”
    • “To avoid foreign-currency risk to dollar-debt repayment, Nigeria has to keep up foreign-currency reserves to be stable and high enough. They also need to improve their debt service-to-revenue ratio”
    • “Nigeria has an interesting debt challenge. It has one of the highest debt service-to-revenue ratios in Africa, yet it has one of the lowest debt-to-GDP ratios in the region.”
  • Gaimin Nonyane, the London-based economic-research head at Ecobank Transnational Inc.:
    • “Higher bond proceeds, alongside our expectation of higher oil export receipts, should bode well for foreign-currency reserves, and hence provide support for the naira. Therefore from a foreign-currency risk perspective this development should be positive for the economy”
    • “The key concern would be on the government’s ability to invest the funds in productive areas of the economy that will generate significant revenue”
    • “Another main concern is that the higher prospect for foreign-currency liquidity might see the government relapse in its diversification program and oil saving efforts and engage in excessive spending (especially with an election in 2019). That will undermine inflation, the naira and the interest rate environment.”
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