Renewed militant attacks on Nigeria’s oil and gas infrastructure, combined with a recent downgrade of the country’s sovereign debt ratings may make it more difficult for the government to borrow from international capital markets this year putting a question mark on the Federal Government’s ability to fund the 2016 budget.
Subdued investor appetite for dollar denominated debt issued by Africa’s largest economy may see Nigeria pay an additional risk premium on the $5 billion it intends to borrow abroad to help plug a budget deficit equivalent to 2.2 percent of GDP.
“Given the financial difficulty of the country and the worsened credit ratings, it may be difficult to raise the money. If we are ready to go to the debt market, we should be ready to pay a high risk premium,” said Bismarck Rewane, Managing Director/CEO of Financial Derivatives Markets Limited, by phone.
“We will be borrowing at a rate higher than the rate we have ever borrowed as a country. The funding costs will be too high for us. In short, we may not have the capacity to pay back interest on loans,” said Rewane.
Nigeria’s 6.375 percent, $500m eurobond yields due 2023 closed trading at 7.41 percent on May 25, according to data from the Debt Management Office (DMO).
The country gets almost 70 percent of government revenue and 95 percent of export earnings from oil sales.
The Federal Government announced a record budget for 2016, forecasting a doubling of the deficit to N2.2 trillion ($11 billion) intended to help the country adjust to the downturn in oil prices.
Militant attacks on gas pipelines operated by indigenous and international oil firms in the Niger Delta region have dealt a huge blow to government revenue, costing it an estimated $29 million daily and its top spot as Africa’s largest crude producer.
The acts of sabotage by new militant group, the Avengers, have reduced the country’s oil output to 1.4 million barrels per day (bpd) from 2.2 million bpd, the lowest in more than two decades.
“With the passage of the budget, some recovery in oil prices, and hopes for increased economic momentum, perhaps we will start to see both a cyclical and structural acceleration in revenue. Without it, Nigeria may be forced to temper some of its medium term spending plans”, Razia Khan, Africa Chief Economist at Standard Chartered Bank said in an emailed response to BusinessDay.
Moody’s Investors Service on April 29 downgraded Nigeria’s long-term issuer ratings to B1 from Ba3.
The key drivers of the rating action are Nigeria’s increased external vulnerability brought about by the prospect of lower-for-longer oil prices; execution risk in the transition to a less oil-dependent Federal budget, and an elevated interest burden over the next two years, according to Moody’s.
Standards & Poor’s (S&P) in March revised Nigeria’s sovereign credit outlook to negative, from the stable. In a note, S&P said Nigeria’s foreign exchange policy was creating dislocations in product and financial markets, saying that the negative outlook it assigned to Nigeria reflected the possibility of downgrade in coming 12 months, “If there is deterioration of Nigeria’s fiscal or external accounts.”
Both rating actions cast serious doubt on the country’s ability to access external financing at a reasonable rate this year.
Nigeria’s Minister for Finance, Kemi Adeosun, in a recent presentation said $4.5 billion will be raised from multiple and external sources including multilateral agencies and export credit agencies.
“Additional funds will be raised from the international and domestic capital markets,” said Adeosun.
Foreign exchange (FX) restrictions imposed by the central bank (CBN) and liquidity shortage in the FX market, made JPMorgan Chase & Co. as well as Barclays Plc, exclude Africa’s most populous nation from its local-currency emerging-market bond indexes tracked by more than $200 billion of funds.
The dip in crude output, coupled with sinking company profits have largely disrupted the predications in the 2016 budget, putting the revenue generation target under significant threat.
With recent figures from the National Bureau of Statistics (NBS) showing the inflation rate at a near 6 year high of 13.70 percent, and the danger of an economic recession; bond yields may spike as investors demand a high premium for holding risky assets, also putting the 2016 domestic borrowing plans of close to $950 billion at risk.
“There are strong indications that government borrowings will rise in the coming months. We could see a gradual retracement of yields to the pre-monetary policy committee MPC meeting levels on the back of this. The bid/offer yield on the January 2022s for instance was as high as 14.65%/14.35% on 19 May,” said Tajudeen Ibrahim, team head, Chapel Hill Denham, in an emailed note to BusinessDay.
Another headwind could emerge if the United States Federal Reserve resumes a tightening bias at upcoming meetings, meaning fund managers will reduce allocations to Nigeria and other emerging market countries exposed to commodity prices.
Rewane of FDC says government should focus more on Public Private Partnerships (PPP) in raising funds to finance infrastructure projects like the Lagos State government has just undertaken in consortium with investors to raise N844 billion to construct the fourth mainland bridge.
“If you don’t have the money, go into a scheme that will raise the money for you,” said Rewane.
BALA AUGIE, HOPE MOSES-ASHIKE & LOLADE AKINMURELE
