Eurobond: Poor proceeds’ management causes default
By Omodele Adigun, Isaac Anumihe and Uche Usim, Abuja
At a time worldwide public and private debt is at an all-time high, Nigeria is on the march again, to the UK and U.S.on roadshow to woo investors on impending $1 billion Eurobond issue.
According to the Director-General, Debt Management Office (DMO), Dr. Abraham Nwankwo, the proceeds of the Eurobonds, this time round, would be committed to capital projects.
The latest roadshow would be the third time the country would hit the international capital market for funds, with motives varying each time. For instance, in January 2011, when Nigeria issued a $500 million debut Eurobond, that was heavily oversubscribed, the Federal Government said its objective was to set a benchmark yield curve in the global market, rather than to raise funds, meaning the country had ample funds to repay investors.
Analysts even attested to this: Standard Bank analyst, Samir Gadio, pointed out that Nigeria’s foreign reserves were 67 times the Eurobond size and that its external debt-to-GDP ratio was just 2.3 percent.
“Overall, the risk of default on the Eurobond is marginal,” he said in a research note.
However, in July 2013, when the nation comfortably raised $1 billion on its return to the Eurobond market, the proceeds were to be spent on infrastructure.
Dr (Mrs) Ngozi Okonjo-Iweala, the then Finance minister was quoted as saying: “We’re very happy that at this time, when the markets are exhibiting turbulence, we were able to achieve … four times oversubscription.
“The coupon shows confidence in the Nigerian economy. The money would be spent on infrastructure.” That also included power and energy infrastructure, the bane of the economy.
But three years down the line, while Nigerians were yet to see the impacts of the previous two eurobonds, and contrary to the notion that the country has ample funds to repay investors, foreign exchange has dried up and end users are groaning; the nation’s currency has taken a plunge, while public utilities still remain in shambles, the nation has indicated its intention to issue $4.5 billion Eurobond in the next three years. This, according to the Debt Management Office (DMO), will be done in tranches, with the first tranche of $1 billion to be issued later this year.
As an indication of the aparthy of global business community on Nigerian economy, Guinness Nigeria last week notified the Nigerian Stock Exchange (NSE) that its parent company, Diageo Plc will no longer proceed with its potential offer to increase its equity stake in the company.
Guinness Nigeria in a notice to the NSE signed by Rotimi Odusola, Company Secretary said Guinness Overseas had confirmed that it will not proceed with the potential offer for up to 15.7 per cent of the share capital of the company as earlier announced on September 9, 2016.
It said in light of the challenging market conditions in Nigeria over the past 12 months, Guinness Overseas proposed to focus its resources on continuing to support Guiness Nigeria.
“Diageo has confirmed that it maintains a positive outlook for Nigeria in the long-term and that it expects the market to continue to grow,” the statement said.
“The Federal Republic of Nigeria (FRN) is in the process of establishing a $4.50 billion Federal Government Medium Term Note (FGMTN) programme, 2016-2018, out of which it intends to issue $1.00 billion Eurobond in the year 2016.
The purpose of establishing the FGMTN programme is to enable the FRN have the flexibility of quickly taking advantage of favourable market conditions in the International Capital Market (ICM) to raise funds, if and only when the need arises.
“In view of the foregoing, the Debt Management Office (DMO), on behalf of the Federal Government of Nigeria, wishes to appoint: two international banks as Joint Lead Managers; and, one local bank as Financial Adviser for the planned FGMTN programme and the issuance of $1.00 billion out of the $4.50 billion FGMTN programme in 2016,”DMO said.
In 2014, IMF Managing Director, Christine Lagarde, cautioned African countries against endangering their debt ratios by issuing sovereign bonds.
And in the same year, Maria Kiwanuka, former finance minister of Uganda and current economic advisor to the president, alluded to the fact that African governments are under pressure to take on debt at market rates despite the risk of public debt rising to unsustainable levels during currency depreciation and increasing bond yields.
But the national co-ordinator, Centre for Social Justice (CSJ), Mr. Eze Onyekpere in a telephone chat with Daily Sun said Nigeria was on the right path to seek external debt but must be mindful of the nation’s debt sustainability.
“Nigeria in trying to raise funds for capital projects and Eurobond through a roadshow is a normal thing. But there is a caveat. The money should be used for developmental projects like railways, bridges, healthcare and other needed infrastructure. It’s not for capital projects like buying SUVs for government officials and all that. We should also look at out debt sustainability to ensure we are not in more trouble at the end of the day,” he cautioned.
According to a top government official, “the roadshow is a pre-marketing engagement with prospective investors. The DMO is still finalizing the appointment of joint lead managers and financial advisers for the Eurobond offering even though bids for the roles closed on September 19,” the official said. Under the N6.06 trillion budget for 2016, the federal government plans to raise N900 billion from external sources and N984 billion from local sources to fund the N2.2 trillion budget deficit.
“In August, the government approved a three-year rolling external borrowing plan targeted at raising low-cost financing from institutions such as the World Bank, African Development Bank, China Exim Bank, and the Japanese International Cooperation Agency”, he said.
According to Professor Badayi Sani of Bayero University, Kano, whatever step the Federal Government takes to bring investors into Nigeria is welcome.
“Whatever it takes for the government to woo investors is acceptable. But at the same time, we have to realize that these investors, particularly in western countries, must make sure that the environment is conducive for them to make a margin out of their investment either in the short term or in the medium term. Normally, before they come, they do cost benefit analysis. They make sure that before they come, whatever capital they put in must earn some returns. Under these circumstances, the best way out, sometimes, is to provide an enabling environment for domestic investors,” he said.
A development economist, Mr. Odilim Enwegbara, in his own contribution said: “Rather than euobond, I would insist on panda bond, which is yuan-denominated bond. Our inability to secure bilateral currency swap, means that since we want to borrow cheaply overseas, it’s better to go for Chinese loans infrastructure-based loans, being Chinese model. This is good for us because being project targeted, they will reduce our present high cost of doing business, which by growing the economy will create jobs.”
Uganda is the only African country that has spoken of the acquisition of Eurobonds as too risky for countries on the continent. Governor of the Bank of Uganda Emmanuel Mutebile, said:
“We should not be complacent about the dangers of big projects built on sovereign debt because it would be unwise for African countries, which will never again get debt relief. From what we are seeing in Ghana, we are not yet ready to issue sovereign bonds.
But DMO said Nigeria’s external debt accounted for only 18.33 per cent of the country’s total debt stock of about N16 trillion.
Nwankwo explained that, within that very small external debt, concessional debt (with average interest rate of about 1.25 per cent per annum and average tenor of about 40 years), accounted for about 80 per cent of the total.
“Correspondingly, the external debt service accounted for an insignificant proportion of the total public debt service expenditure: The annual external debt service expenditure for the last 5 years was always less than 6.5% of the total public debt service outlay.
These features reflect the strategic stance taken after the exit from the Paris and London Club debts in 2005 and 2006 respectively. Nigeria deliberately decided to develop and depend more on the domestic bond market as a reliable alternative source of borrowing by the government. This was to avoid compelled dependence on external sources” he said.
According to Nwankwo, the external debt stock is currently about 23 per cent of the export earnings, whereas the applicable threshold is 150 per cent, adding that this is seven times stronger than it needs to be.
“Similarly, the external debt service is currently about 0.74 per cent of total export earnings, compared to the applicable threshold of 20 per cent: this means that this liquidity indicator is 27 times stronger than what is required to guarantee that the external debt can be serviced as and when due. In addition, there is an administrative safeguard: since 2005, Nigeria’s prudential public debt management practice has been that debt service charge is the topmost item in the sequence of the line of expenditures in the budget. Only very few other developing economies could boast of such a healthy and attractive external debt condition” the DG, explained.
Nwankwo explained that Nigeria’s external debt is uniquely of top investment grade and this is the reason that in spite of global economic and financial tribulations, Nigeria’s Eurobonds have continued to trade creditably at stable low yields relative to the weight of the challenges and compared to other countries’ eurobonds.
“Empirically, this position is well supported by investors and the markets. That is why inspite of global economic, financial and foreign exchange tribulations, as well as local structural challenges which have manifested since mid-2014, Nigeria’s Eurobonds have continued to trade creditably at stable low yields relative to the weight of the challenges and compared to other countries’ Eurobonds.
For example, Nigeria’s 10-year Eurobond (2013-2023), which traded at an average yield of about 6.945 per cent for 2015 and at 8.680 per cent for January 2016, has been trading at a daily yield of between 6.147 per cent and 6.571 per cent so far throughout the month of September 2016. Similarly, the current yields on both the 2013 – 2018 five-year Eurobond and the 2011-2021 10-year Eurobond are lower than their January 2016 figures by about 280 points and 215 points respectively. In summary, Nigeria’s Eurobonds are substantially in greater demand and are more highly priced than they were about a year ago” he noted.
Trevor Hambayi, writing in The Conservation’s newsletter, traced the history of the world before sovereign bonds:
“Prior to these countries issuing the bonds, they carried foreign debt in the form of bilateral and multilateral concessional loans. These loans carried an average interest rate of 1.6 per cent and a maturity of 28.7 years. The financing from sovereign bonds comes at an average floating coupon rate price of 6.2 per cent with an 11.2-year maturity period. In recent times, the coupon rates on these bonds have hit record highs. This is a reflection of deteriorating economic indicators among sub-Saharan African countries.
“The Achilles heel for these countries, outside the realm of poverty, governance and political will, is their dependence on one major export product to generate foreign exchange. In at least seven of these countries there is direct dependence on one key product to drive the country’s economy. This is evident with Angola (oil), Zambia (copper), Nigeria (oil), Gabon (oil) and the DRC (copper).
“The cost of finance for the Eurobonds is the first key risk factor. Internal analysis of the exchange rate risk must be considered, unless the country truly believes that it has the capacity to raise the resources for repayment of the debt from commodity export revenue.
But future indicators are all very ominous, showing a slowdown in demand for commodities from China, a possible increase in bond yield rates by the US, lowering oil prices and downgrading of global growth indicators. All these factors will put pressure on countries that have issued sovereign bonds.
“The second key risk in the procurement of sovereign bonds lies in debt sustainability. This is the risk associated with poor management of the proceeds of the Eurobond. They end up being invested in non-income-generating social infrastructure to the extent that the government is unable to raise the necessary funds to repay the loan. Other than capital infrastructure developments at least three of the countries – Rwanda, Gabon and Ghana – have used part of their Eurobond proceeds to re-finance public debt.
Sub-Saharan African countries seem to carry a vicious circle of problems revolving around underdeveloped economies. They oscillate around single-commodity exports, recurring power deficit issues, lack of fiscal discipline with budget deficits well above the convergence criteria for Africa of 3% of GDP, and unending rising debt positions even in times of good economic growth.
The cyclical events of unsustainable debt of the 1980s, when the continent’s debt position stood at more than $270 billion, was attributed to – depending on which side of the fence you’re on – poor governance, corrupt leadership and protracted civil wars in many African countries.
The continent was also undergoing rapid population growth while lacking any meaningful democratic checks and balances, and implementing ambitious social and public growth strategies. The crossroad again was with the economic downturn and the drop of global commodity prices. These countries have come a full circle.
Sub-Saharan African countries will require strong political will, prudent financial management, sustained fiscal discipline, long-term economic growth strategies, export diversification and sustained creation of employment to achieve economic emancipation. The current global economic slow down will prevail for at least three to four more years. This means that these countries will continue to bear rising inflation, debt repayment crisis, reduction of GDP growth and challenges with managing their fiscal deficits.