President Goodluck Jonathan’s 2014 budget currently before the National Assembly will spend a record amount to service the national debt amid rising budget deficits and higher borrowing costs.
Interest expense on the total public debt(domestic and foreign) will rise to N712 billion in 2014, according to the budget proposals, a 20 percent increase from the N591.7 billion spent on debt service in 2013.
The payments which are equivalent to 1.7 percent of year end (YE) 2012 Gross Domestic Product (GDP) may rise further with the government forecast to run cumulative deficits of close to N1trillion through the end of 2016, according to the Medium Term Economic Framework (MTEF).
The nation’s N8.32 trillion ($53.4 billion) total debt outstanding (September 2013) is now equivalent to 20 percent of Nigeria’s N42 trillion economy, excluding AMCON bonds, which the sovereign guarantees.
While borrowing costs on average have retreated from as high as 18 percent in early 2012, bond yields are now on the upswing as foreign investors who hold 25 percent of Nigerian sovereign debt fret over a pullback in U.S Fed stimulus and political uncertainty in the country.
“The uncertain political outlook, investor concerns about the transition at the CBN and a likely leg of pre-electoral fiscal expansion, as well as higher bond issuance volumes from next year, will not be conducive for further yield compression at the long end,” Standard Bank analysts, led by Samir Gadio, an emerging markets strategist, said in a note released Dec. 16.
Yields on 10-year FGN bonds due 2022 extended their gain to 13.20 percent on Monday. They are up 51 basis points since Dec 2, as the impact of the Feds announcement that it will cut its bond-purchase stimulus program begins to get felt.
The Feds policy had boosted asset prices and spurred record capital inflows to emerging and frontier markets like Nigeria.
Offshore investors held approximately $5.4 billion in Nigerian bonds, as of September 30 this year up from $1.2 billion in at the end of September 2012, according to a November 25 Reuter’s report.
Debt service costs in 2014 are equivalent to 78 percent of the N912 billion budget shortfall projected for next year.
Forecasts of higher debt service expense raises pressure on the Finance Ministry and President Jonathan to plan for curtailing the debt.
The Finance Minister Ngozi-Okonjo Iweala has called for a shift away from often expensive domestic debt to cheaper dollar denominated borrowings.
The government plans to increase foreign borrowing to about 40 percent of total debt from the current 14 percent, Okonjo-Iweala said.
The government will opt for cheaper, longer-term foreign loans and reduce short-term domestic borrowing.
Nigeria issued a $500 million 5-year bond at a yield of 5.375 percent and a $500 million 10-year bond with a yield of 6.625 percent, in July 2013. The 10 year Eurobond was issued at a yield approximately 650 basis points cheaper than comparable domestic debt.
Domestic debt stood at N7.03 trillion ($45.1 billion) at the end of September while foreign debt stood at N1.28 trillion ($8.2 billion), according to the Debt Management Office (DMO).
Foreign debt service payments have largely stayed stable at N47.60 billion, N48.3 billion and N48.3 billion for 2012, 2013, and 2014 respectively, according to data from the FG budget proposals.
Domestic debt service payments have however spiked to N663.6 billion in 2014, from N543.37 billion and N511.98 billion in 2013 and 2012 respectively.
The medium term outlook for borrowing and debt service payments seem however to be in an upward trajectory in the near term.
“The still-ambitious 2014 oil output assumption (2.39mmbd versus 2.53mmbd in 2013) is likely to require further augmentation of budget revenue using Excess Crude Account (ECA) proceeds,” said Razia Khan, head of Africa research at Standard Chartered Bank.
“With ECA savings thought to have declined to close to $ 3.3bn, this raises upside risks to borrowing projections.”
