- $5.5b Eurobond: Govt Eyes December Deadline
The Federal Government will, through the Debt Management Office (DMO), raise $5.5 billion from Eurobonds sales latest by December.
This will bring the total funds raised through the Eurobond –International Capital Market (ICM) by the Federal Government to $7 billion in less than one year. A total of $1.5 billion was previously raised in two tranches of $1 billion and $500 million.
In a report released yesterday by FBN Capital Research, titled: Job done by the DMO Yet Still More to Do, the investment and research firm said, the debt office approaches this week’s regular auction of Federal Government of Nigeria (FGN) bonds from what appears a position of strength.
“It has already met its target of N1.25 trillion in domestic financing of the 2017 FGN budget deficit. It has collected N1.26 trillion (gross) from the nine monthly auctions held to date, and is looking to raise a further N100 billion from the reopening of the five and 10-year benchmarks,” it said.
The report said the bid for the offer has been strongest for the 20-year paper, which is not on offer this month or indeed for the rest of the quarter.
“In the secondary market, the yields on the two issues on offer this week have declined by about 110 basis points since the last DMO auction, to 14.88 per cent for the July 21s and 14.81 per cent for the March 27s on Friday. The authorities will be hoping that the bid will be healthy and conceivably match September’s (N395 billion), with a strong offshore element,” it said.
The report said that while the DMO has bought itself some room for manoeuvre due to its textbook front-loading of issuance, it knows that it may have to raise additional funds because the 2017 budget deficit is almost certain to overshoot the projected N2.36 trillion in view of poor non-oil revenue collection.
At the same time, it may have to adjust its strategy for the uncertainties surrounding the attainment of the target of N1.07 trillion (US$3.5 billion at the budget rate of N305) for external financing of the deficit. We await patiently the National Assembly’s go-ahead for these sales and for the FGN’s planned debt restructuring.
In a related report, Sub-Saharan Africa Economist, at Renaissance Capital (RenCap), Yvonne Mhango said, the plan to borrow $5.5 billion through Eurobonds will raise the country’s debt service to revenue cost beyond 62 per cent.
She said capital releases for the 2016 budget continued into the first quarter of this year while public debt has increased by seven percentage points of Gross Domestic Product (GDP) since 2014.
On the debt service/revenue, she said: “Nigeria’s debt service/revenue has risen sharply in recent years to 62 per cent at June 2017 against 29 per cent in 2014. This largely reflects the Federal Government’s low revenue/GDP target of four per cent this year. The Federal Government plans a $5.5 billion Eurobond issuance before year-end 2017, as part of its efforts to lower local interest rates, by reducing domestic debt/total public debt to 60 per cent, against over 70 per cent today”.
Mhango said budget performance in the first seven months of this year and debt developments showed there were no capital releases for the 2017 budget, because it was passed late. She said the Federal Government’s 2017 budget of N7.4 trillion was 6.2 per cent of GDP, and was signed by the executive, after being passed by the Senate in May.
Of this, N3.1 trillion (2.5 per cent of GDP) was spent in seven month. “Expenditure in seven month was 30 per cent below the (pro-rata) target and was entirely made up of recurrent spending. There were no capital releases from the budget because of its late approval. However, capital releases did take place in seventh month, as the 2016 budget continued to be implemented into first quarter of this year,” she said.
Mhango said revenue came in on target, at N2.6 trillion (2.1 per cent of GDP) because of a one-off refund from the Paris Club. “When this is stripped out, there was a 20 per cent shortfall in revenue. Below-target spending – due to delayed capital releases – explains the small budget deficit for seven month of 0.8 per cent of GDP, by our estimate, as against the 1.5 per cent (pro-rata) target,” she said.
She disclosed that the federation account revenue was one-third below target, and that three-quarters of the FGN’s planned revenue for this year is expected to come from the Federation Account, of which two-thirds will stem from oil revenue.
She, however, said Nigeria’s public debt/GDP is low as against the Sub-Saharan African average of 45 per cent, but it has seen a strong increase in recent years, adding that since 2014, it has risen by seven percentage points of GDP to 16.4 per cent of GDP in June 2017, with 70 per cent of the increase due to domestic debt.