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Budget: FG’s planned borrowings to increase debt stock to 12.8% of GDP

By on February 18, 2016

The projected net borrowings in the federal government’s 2016 budget proposals will increase the government’s debt stock by a further 1.8 per cent, taking Nigeria’s total debt to 12.8 of gross domestic products (GDP), THISDAY checks have revealed.
The latest report from the Debt Management Office (DMO) showed that the federal government’s domestic debt at N8.84 trillion ($44.9 billion) at end-December 2015, equivalent to 8.9 per cent of estimated 2015 GDP.

When we add the federal government’s external debt (at $10.72 billion equivalent to 2.1 per cent of estimated 2015 GDP), we arrive at a burden representing 11.0 per cent of GDP, the DMO noted in the report.

This is, however, excluding bank borrowings of the states, the obligations of the Nigerian National Petroleum Corporation (NNPC), the Asset Management Corporation of Nigeria (AMCON), other public agencies, the arrears due to contractors and contingent liabilities such as guarantees.

Under an implausible worst case scenario, assuming for example that AMCON makes no further recoveries, experts said the burden could rise to 25 per cent of GDP.
“An estimate of total public debt would have to include the naira bonds and residual bank borrowings of the states, the obligations of the NNPC, AMCON and other public agencies, the arrears due to contractors and contingent liabilities such as guarantees,” said analysts at FBN Capital.

These metrics, they added, underpin Nigeria’s sovereign credit ratings (BB- from Fitch and the equivalent from Moody’s), and B+ from S&P.

However, given that Nigeria is an emerging market, and particularly in the context of comparable oil producers, analysts argued that this indebtedness is modest.

The preliminary conversations with the World Bank and the African Development Bank on budget support are therefore no cause for alarm.

Meanwhile, the data from the DMO, which appeared to have been moved to a semi-annual reporting cycle, showed increases of N440 billion for the total burden over the six months (and of N510 billion for FGN bonds).

This follows the FGN’s rescue plan in which the bank borrowings of most state governments were converted into federal long bonds (the Jul ‘34s).

“The oil price shock has closed pricing differentials for the FGN. Eurobond issuance in the middle of the curve would probably be priced at around 950bps based on current yields, and so more than 250 bps below FGN bonds of similar tenor. The differential has narrowed by about 200bps in the past year. Although the FGN is said to have put the Eurobond issuance on the back burner, we believe this is temporary. The FG is still likely to favour a new Eurobond issue, whatever the size, to flag a strong credit story under temporary fiscal pressure,” said FBN Capital.