|
Getting your Trinity Audio player ready...
|
Nigeria’s growing use of the international capital markets may increase refinancing risk as the amount of international debt coming due rises, US based rating agency, Fitch said .
“Borrowing in foreign currency in international markets, exposes sovereigns to Foreign Exchange (FX) refinancing risk and a potentially higher debt service/GDP burden in the event of local currency depreciation,” it said.
“Although it can appear cheaper if domestic interest rates are high, as in Nigeria, which used the proceeds of its February issue to refinance more expensive naira-denominated debt, it generally involves a net increase in risk,” The global rating agency added.
Nigeria’s external debt as at December 31st 2017, touched $18.9 billion, according to data provided by its Debt Management Office (DMO).
The federal Government through the ministry of finance in February 2018, successfully sold $2.5 billion of Eurobonds to compliment the $3 billion it raised in November last year, as part of its on-going debt restructuring strategy aimed at increasing external debts from 23 percent to 60 percent, and cutting down on domestic debts from 77 to 40 percent.
Patience Oniha, Director General of Debt Management Office (DMO), said that “for government to plan execute its plan enunciated by the Economic and Recovery Growth Plan (ERGP), Medium Term Economic Framework (MTEF) and other associated fiscal strategies, it has to spend and borrowing is a mechanism to do that”.
Also, the DMO said “borrowing has stimulated the economy and has helped lift it out of the recession”.
More recently, sub Saharan African countries have shown increased appetite to tap from the international Debt market finance.
This also continued through in first quarter 2018(1Q18), with issues from Kenya (USD2 billion), Cote d’Ivoire (EUR1.7 billion) and Nigeria (USD2.5 billion). Ghana’s parliament last month approved plans for a Eurobond issue.
The International Monetary Fund recently warned that emerging economies face the mounting risk of a debt crisis, as their pace of borrowing in the international capital markets increases.
Since 2013, the median ratio of public debt to gross domestic product in low-income countries has risen 13 percentage points to hit 47 per cent in 2017, according to new research by the IMF.
The research found that 40 per cent of low-income developing countries face “significant debt-related challenges”, up from 21 per cent just five years ago
According the global agency, maturities of this debt might appear manageable in the near term, but public financial management (PFM) in the region is often weak, meaning that capacity to manage refinancing risk is an important factor in our SSA sovereign credit assessments.
Tapping international capital markets can be an important financing option where liquidity in local funding markets is low. Long-dated international issuance can extend repayment schedules (Kenya and Cote d’Ivoire’s 1Q18 deals both featured 30-year tranches). Market access that allows for opportunistic international debt issuance is therefore beneficial for SSA sovereigns.
However, the rise in debt since 2011, growing use of commercial funding, and in some cases currency depreciation have increased debt servicing costs in some countries. Seven of the 18 Fitch-rated SSA sovereigns had general government interest payments/revenues above 15 percent last year, the highest since at least 2000.
Weak PFM could increase the challenge of transitioning from concessional to commercial funding, and of managing the associated risks, such as exposure to tighter global monetary policy and the capacity to navigate interest rate and currency risks.
It may also make Eurobond repayments and rollovers challenging, if market conditions were to deteriorate.
World Bank data shows that Fitch-rated SSA sovereigns excluding South Africa will need to repay international public and publicly guaranteed bonds totalling USD6.5 billion in 2019-2023, up from USD1.4 billion in 2014-2018.
PFM in these regions have seen some improvement, and IMF programmes often include efforts to strengthen it. In Cote d’Ivoire, for example, improved PFM under the country’s 2016-2019 programmes has helped reinforce the sovereign’s financing flexibility.
But PFM weaknesses in the region are still apparent, for example in the tendency to accumulate arrears and the use of state-owned enterprises for quasi-fiscal operations. In some cases, such as the Republic of Congo (CC) and Mozambique (RD), PFM deficiencies have resulted in a lack of transparency in the public finances and contributed to recent defaults.
SSA Eurobond maturities are spread out over the next decade, but weak PFM still means there are risks associated with them.
Weak PFM also means that upward pressure on government debt will persist, as it limits the capacity to implement consolidation plans and to contain spending and mobilise domestic revenue sources more fully.
“We expect median SSA general government debt to be broadly stable this year at 52.6 percent of GDP, following a rise of over 20pp in the preceding six years. This reflects improved commodity prices and fiscal consolidation in some countries, including those with IMF programmes. (The total agreed amount of the IMF’s outstanding arrangements with SSA countries rose nearly fivefold between end-2014 and end-2017, largely in response to the commodity price shock,” Fitch said.
MICHEAL ANI
