By Henry Umahi
As the Federal Government basks in the euphoria of the over-subscription of its $3 billion Eurobond, the director-general of the Debt Management Office (DMO), Ms. Patience Oniha, has explained why this happened.
In an interview with a group of journalists, the DMO DG talked about foreign investors’ confidence in Nigeria, why government is still borrowing and the benefit of borrowing, among others.
The DMO is always borrowing in the domestic market, and now seems to want to extend this to the external market. Don’t you see this as creating a debt burden for Nigeria?
It is important to state upfront and to re-assure Nigerians that the government’s borrowing is pre-approved by the executive and legislative arms of government and are used to finance various activities of government as appropriated. These layers of approvals ensure that the borrowing is both necessary and scrutinised before the DMO embarks on actual borrowing. The increasing focus by the current administration of using borrowed funds for infrastructural development is a step in the right direction. As borrowing is deployed to infrastructure to promote economic growth, the benefits of job creation and increased production, among other benefits, are good for all Nigerians.
The other part of the argument about debt becoming a burden is the issue of Nigeria’s revenue base, which, at 6 per cent of GDP, is not only low but well below that of peer countries. Thankfully, government’s revenue is now being given proper attention. The measures to increase revenues are already yielding some results and, as this trajectory continues, the need for borrowing is expected to reduce while debt service will become an increasingly smaller portion of revenue. The debate on debt burden should, therefore, shift to actively supporting the government to increase revenue to levels comparable to the sub-Saharan average of 17 per cent of GDP.
In a first of its kind, the government issued a 30-year Eurobond. What is the significance of this?
It is remarkable that international investors were willing to take a long-term risk on Nigeria by buying the 30-year Eurobond. This feat is even more remarkable when we consider that South Africa, which has a superior sovereign rating of BB- compared to Nigeria’s B+/B rating, is the only sub-Saharan country that has issued a 30-year bond in the international capital market. The other outstanding aspect of the 30-year Eurobond is its pricing at 7.625 per cent, which is lower than the coupon of 7.875 per cent on the $1.5 billion 15-year Eurobond issued earlier in the year.
In terms of its specific benefits to Nigeria, it provides the appropriate funds for financing infrastructure, which is typically long-term, while also reducing the refinancing risk of the debt stock. It will also serve as a benchmark for local and foreign institutions, which may need to raise long-term US dollar funds to invest in Nigeria under various PPP arrangements for infrastructure as well as privatisation.
The $5.5 billion bond in international financial markets generated a lot of interest. Could you shed some light on this?
Perhaps, I should start by giving some context to your question by first explaining the debt strategy of the government. The DMO had, for several years, raised funds for the government largely in the domestic market through Federal Government of Nigeria bonds and Nigerian treasury bills and, to a limited extent, from external sources, mainly the multilaterals. While this had a beneficial effect of developing the domestic debt capital market, government became the dominant issuer, to the extent that it has been regularly accused of crowding out the private sector. The later outcome was obviously not intentional. To remedy the situation, the DMO deemed it fit to shift some of the borrowing activities to international financial markets. This is also in line with its debt management strategy of achieving a portfolio mix of 60 per cent domestic and 40 per cent external. Through the strategy, the share of domestic debt has been brought down from over 85 per cent to 77 per cent as at September 2017.
Now, to your specific question on the $5.5 billion. It is made up of two components, the first of which is $2.5 billion to part-finance the deficit in the 2017 Appropriation Act. The 2017 Appropriation Act included new borrowing of N1.254 trillion from the domestic market and N1.068 trillion equivalent of about $3 billion from external sources. As at October 2017, only $300 million in the form of Diaspora Bond had been raised, leaving an unfunded balance of $3.2 billion. The other component of the $5.5 billion external capital raising is the $3 billion whose proceeds are to be used to repay some maturing domestic debt obligations.
The Eurobond was oversubscribed by over $11 billion, which was almost 400 per cent of the $3 billion that government took. Could you explain the high subscription and why you accepted less than the $5.5 billion approved by the National Assembly?
The demand of over $11 billion from international investors is a demonstration of their confidence in the policies and reform initiatives of President Muhammadu Buhari as well as the economic outlook of Nigeria. Like those investors, we ourselves can attest to the economic improvements in Nigeria as demonstrated by higher external reserves, stable exchange rate, GDP growth of 1.44 per cent in the third quarter of 2017 and improvement in the ease of doing business.
Our intention was not to raise the $5.5 billion at once. Our first priority was to raise the $2.5 billion required for the 2017 budget, while the $3 billion required for refinancing domestic debt would be in a phased manner. Also, from a technical perspective, we still wanted to moderate the cost even in the international capital market, by managing the supply of Nigeria’s Eurobonds in the market.
What are the benefits of this borrowing?
The DMO’s roles in financing budget deficits, as provided in annual appropriation acts, are to support budget implementation and the attainment of government’s economic targets. The $2.5 billion is specifically targeted at fulfilling the DMO’s mandate in this regard.
On the $3 billion for refinancing domestic debt, there are several benefits, one of which is that it will reduce the crowding out effect that I earlier referred to, thereby creating more space for other borrowers in the domestic market. It also has the potential to bring about a reduction in lending rates, which would make the cost of production of goods and services by the private sector cheaper and more price competitive.
Another major benefit of external capital raising is a lower cost of borrowing to government and a moderation in debt service costs. As you know, US dollar interest rates are much lower than naira interest rates. The $1.5 billion 10-year and $1.5 billion 30-year Eurobonds were issued at coupons of 6.5 per cent and 7.625 per cent per annum, respectively. These coupons are certainly much lower than the 15 per cent to 17 per cent that government borrows at in the domestic market for shorter tenured funds. There is also the fact that the $3 billion is a direct accretion to Nigeria’s external reserves, which are extremely useful for managing the naira exchange rate.