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2018: Rising Debt May Lead to Extra Burden, Say Experts

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  • 2018: Rising Debt May Lead to Extra Burden, Say Experts

Nigeria’s total debt stock rose by N8tn between September 2015 and September 2017. The country’s total debt stock as of the end of September 2017 stood at N20.37tn, while the debt as of the same period in 2015 was N12.36tn.

This means that within a period of two years, the country’s total debt exposure rose by N8.1tn. In terms of percentage increase, the country’s total debt rose by 64.81 per cent within the period.

Two years before, the external loan component of the country’s total debt stood at N2.09tn. However, as of September 30, 2017, the external debt component stood at N4.6tn. This means that the external debt component rose by N2.6tn or 124.4 per cent.

The domestic debt component of the total debt, on the other hand, rose from N10.27tn by September 2015 to N15.68tn in September of the year that just rolled over.

This means that within the two-year period, the domestic debt component rose by N5.41tn. In percentage terms, the domestic debt rose by 52.68 per cent.

Although the external component of the total debt increased by a higher proportion, statistics as of September showed that domestic debt, with its high cost of servicing, still dominated the country’s borrowing pattern.

The September debt status of the nation is not the final for the year as the country continued to borrow money from both local and foreign sources.

One of the major implications of the nation’s rising debt profile is the increasing burden of interest payment. This is especially true as the country has been making less money than before as a result of falling crude oil price in the international market.

In fact, the country’s debt sustainability has become an issue of debate as some experts have argued that Nigeria’s indebtedness is no longer sustainable.

The argument is that with reduced capacity to earn money, the country’s ability to service debt and repay the principal has been impacted. This, the arguments goes, has rendered the nation’s debt unsustainable even though the total debt to Gross Domestic Product ratio is still low.

The argument is simple. A man that earns N100,000 a month is in a better position to repay a N200,000 loan than a man who earns N20,000 a month but has a debt of N100,000 irrespective of whatever they have.

Recognising the country’s diminished income capacity and rising debt profile, the World Bank had advised Nigeria to ensure that it increased its income base or take more loans that come with less servicing commitments.

In practical terms, what the World Bank advised the government to do is to take less domestic loans and more foreign loans since domestic loans come with higher interest payment and have shorter tenors.

The Federal Government made a total of N3.49tn in domestic debt servicing payment between January 2015 and September 2017, investigation has shown.

In the same period, the country paid a total of $1.07bn (about N326.69bn) to service foreign loans obtained by both the federal and state governments.

This shows the wide gap between the size of the domestic borrowing and foreign borrowing, which has seen the government spending much of its revenues, especially during the just exited recession, on debt servicing.

Between October 2015 and September 2017, the Federal Government doled out N2.67tn to service local debts.

Breaking down the debt servicing payment, the Federal Government paid a total of N1.02tn for local debts in 2015. The amount grew to N1.23tn in 2016.

For the first nine months of the year 2017, the debt servicing obligation already exceeded that for the entire 2016 as the Federal Government had already serviced local debts to the tune of N1.24tn.

Most of the payments are for interests incurred on the funds borrowed monthly by the Federal Government using the instrument of FGN Bonds.

In 2016, the interest paid on FGN Bonds amounted to N839.17bn. In the same period, the interest on Nigeria Treasury Bills amounted to N335.58bn, while the interest paid on Treasury Bonds was N28.99bn. A total principal of N25bn was paid for Treasury Bonds.

Similarly, in the third quarter of 2017, interest payment on FGN Bonds accounted for N377.29bn, while that on NTBs amounted to N143.84bn. On Treasury Bonds, N9.38bn was paid; while N159.61m was paid on the new instrument, Savings Bonds.

The huge debt payment is a reflection of both the high interest on local debts as well as the size of the Federal Government’s domestic debt in comparison with foreign debt.

The trend is likely going to continue in 2018. A projection of the Debt Management Office actually shows that the debt service payment over a 10-year period, 2017 to 2026, will be $11.62bn on foreign debts alone.

The payments include some principals that must have fallen due for redemption as well as interests that would have accumulated and redeemed on annual basis.

Accordingly, 2018, 2021 and 2023 will see Nigeria parting with more than $1bn each of the years, because some Eurobonds issued by the Federal Government will fall due for redemption in each of the three years.

Thus, in 2018, the country will be parting with $1.19bn. This includes a principal redemption of $716.09m and an interest payment of $475.8m.

Showing that the trend of high debt servicing will continue this year, the Federal Government has earmarked N2.01tn for debt servicing in 2018.

The provision is 82.6 per cent of the estimates for capital projects. It is also 30 per cent of the projected revenue for the year. This is why some experts claim that the debt burden is hampering investment in infrastructure, which is so much needed by the nation.

Stakeholders, including the Lagos Chamber of Commerce and Industry, have described the provision for debt servicing this year as unsustainable.

Recognising the huge service payment on domestic debt, the Federal Government has yielded to the advice to borrow more from the foreign debt market and has plans to borrow $3bn from foreign sources in order to refinance some local debts.

The Director-General, DMO, Ms. Patience Oniha, said the new strategy would involve reducing the country’s domestic debt to 60 per cent, while raising the external component to 40 per cent.

“Going forward, the objective is to work towards achieving the 60:40 ratio in the way we mix our borrowing between domestic and external,” she stated.

By implication, this plan will also increase the country’s external borrowing by 16.57 per cent in order to raise the external component from 23.43 per cent to 40 per cent.

Economist and social commentator, Odilim Enwegbara, said the rising debt profile could actually scare foreign portfolio investors away from the nation’s economy. His argument is that the debt profile can crash the value of the local currency, a situation that portfolio investors will not like to see.

Enwegbara stated, “As it stands now, most potential foreign investors, especially portfolio investors, are increasingly avoiding our economy for the fear that our debt profile has the tendency of forcing the naira to collapse to the level that they may have difficulty exiting the naira whenever they feel to do so.

“Consumption debts that were never subjected to full-blown debt sustainability analysis are burdening the economy.”

The Head of Social Action (Abuja), a non-governmental organisation, Mrs. Vivian Bellonwu-Okafor, said that the nation’s rising debt profile held a gloomy prospect for the economy.

She stated, “The ballooning profile of Nigeria’s indebtedness has remained most worrisome, particularly for the gloomy prospects it holds for the year 2018. It has indeed become most appalling that despite some seeming positive economic indicators (stable naira, improved oil output, rising oil price etc.), to support de-escalating debt, the reverse has been the case.

“Placed side by side the government’s claims of recovering billions of looted funds (both from home and abroad), plugging leakages in the system and cutting down governance costs, saving billions of dollars variously in external reserves, the ECA as well as the TSA accounts against the borrowing spree the government has been steadily on, including a latest staggering over $5bn to amorphously fund 2018 budget, it will be clear to any right-thinking person that it is either the government is operating an economic management system totally strange to economics itself, or it simply has an unknown agenda with capitalists club of creditors to enslave Nigeria in a debt trap.

“Ordinarily, even on a personal level, borrowing is usually a last resort when all other internal avenues have been exhausted. This is because of the harsh effects of borrowing if not very carefully managed.

“Nigerian administrations gleefully borrow at will and randomly with the least resort to caution or concern for the implications of same on both the economy and consequently, innocent ordinary Nigerians.”

She added, “The 2018 budget will be funded by borrowing. Add this to a staggering N19.6tn as the debt profile outstanding as of June 2017; one will clearly see that there is no hope of letting off steam in the hardship being experienced by Nigerians.

“It is thus sad that for a government that strongly campaigned on reducing the debt burden of Nigeria has not lifted a single finger to live up to this promise, but has on the contrary, greatly increased the burden.”

Bellonwu-Okafor expressed fear that the country might witness more cases of suicide by economically depressed and frustrated Nigerians.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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