A Healthy Ratio for the Public Debt Stock – Coronation Merchant Bank

According to Nigeria’s Debt Management Office (DMO), Nigeria’s total public debt rose by 5.2% quarter on quarter (q/q) or N2  trillion from N39.5 trillion at end-December 2021 to N41.6 trillion at end-March 2022. The total public debt increased by 25.7% or N8.5 trillion when compared to the corresponding period in 2021.

As at end-March 2022, public debt is equivalent to 24% of 2021 nominal GDP, relatively low when compared with other African economies such as Ghana (80%), Kenya (68%), South Africa (70%) and Egypt (93%). This is in line with the DMO’s debt management target of a debt-to-GDP ratio of 40% for the period 2020-2023 and below the limit of 55% set by the World Bank for countries within Nigeria’s peer group.  It is also below the 70% set by the Economic Community of West African States.

Total domestic debt increased by 5.4% q/q and 21.1% year-on-year to N24.9 trillion as at end-March 2022. This can be attributed to increases in FGN bonds (2% q/q), Nigerian treasury bills (16% q/q) and FGN Savings bond (10.3% q/q). The total domestic debt currently accounts for 60% of total public debt.

Within domestic debt, FGN instruments account for 80.6% of total domestic debt, while subnationals represent 19.4%. Bonds and NTBs account for 92.6% of total FGN domestic debt while FGN sukuk, treasury bond, savings bond, green bond, and promissory notes collectively contributed 7.4% to the total.

Based on the DMO’s bond issuance calendars, the debt management office set out to raise a total volume of between N1.1 trillion – N1.2 trillion in H1 ‘22. However, the DMO has raised N1.8 trillion in the first half of the year. This is 50% higher than the set upper limit within the calendar for this timeframe. In our view, the increased supply of FGN bonds should lead to upticks in yields across the curve.

The share of states and the FCT’s domestic debt increased by 8.6% q/q to N4.8 trillion as at end-March 2022 from N4.5 trillion recorded in the previous quarter. On a y/y basis, it increased by 17.5%. The most indebted states were Lagos (N780bn), Ogun (N242bn) and Rivers (N226bn).

We note that with the securitisation of the ways and means advances from the CBN and the addition of AMCON debt, the domestic debt stock is likely to increase. As at end-April ‘22, the stock of CBN’s ways and means advances stood at N16.6trn.

External debt stock stood at USD39.9bn (N16.6trn) as at end-March ‘22. This represents increases of 4.8% q/q and 33.3% year-on-year. The rise can be partly attributed to the USD1.25bn Eurobond issued by the FGN in March 2022. As at Q1, the external debt stock accounts for 39.9% of total public debt.

Within external debt, multilateral, and bilateral loans account for 58.7%, while commercial loans (i.e., Eurobonds and Diaspora bond) represent 39.8%. As at end-March ’22, Nigeria spent N669bn on servicing domestic debt, and N229bn on external debt servicing.

Based on newswires, the FGN suspended its plans to raise an additional Eurobond worth USD950m. The suspension is due to unfavourable market conditions. We note that yields in Nigeria’s Eurobond market have recorded steady upticks on the back of recent monetary policy tightening in advanced economies.

Based on World Bank estimates, each state is expected to record a loss of N5bn in revenue this year. The projected loss is on the back of an expected decrease in Federal Accounts Allocation Committee (FAAC) payouts to states. The Nigerian National Petroleum Corporation has deducted N947.5bn from its remittance to FAAC between January -April 2022. Furthermore, the World Bank considers Nigeria’s public debt as sustainable and projects that it will account for 36% of GDP in 2022.

We suspect that this figure is inclusive of CBN’s ways and means as well as AMCON debt.

Insufficient revenue continues to hamper Nigeria’s fiscal landscape, resulting in one of the highest debt-service-to-revenue ratio (76% as at November ’21) among African economies. Regarding oil revenue, the presence of the fuel subsidy and low oil production continue to undermine the expected benefits from rising oil price (Bonny light closed at USD127/b on 21 June ‘22). Meanwhile, production has averaged 1.5mbpd between January – May’22. This is below OPEC’s quota of 1.7mbpd and the 2022 budget of 1.6mbpd.

On non-oil, the FGN is taking forward steps towards boosting non-oil revenue through strategic initiatives under the Finance Act. While these initiatives are laudable, their effective implementation is critical. To assist with improving current macroeconomic conditions, the borrowed funds need to be channelled towards well-targeted expenses that would support GDP growth, ease supply-chain bottlenecks and reduce the pressure on the country’s unemployment rate.