Borrowing costs up on higher rates
The Nigerian economy is getting squeezed by falling oil prices which is reducing funds available for investment in infrastructure as debt service expenses spike on higher interest rates.
President Goodluck Jonathan’s 2015 budget currently before the National Assembly is historic as it will be the first time the country spends more in any given year since the bond market was resuscitated in 2004 to service the national debt, than to finance capital expenditure.
Interest expense on the total public debt (domestic and foreign) will rise by 32.4 percent to N943 billion in 2015 from N712 billion in 2014. It is also a 59 percent increase from the N591.7 billion spent on debt service in 2013 according to the budget proposals.
Capital expenditure is projected at N634 billion for 2015, down from N1.12 trillion in 2014 and N1.63 trillion in 2013, as the slide in oil prices reduces funds available to finance infrastructure projects needed to unlock growth.
Sovereign borrowing costs are spiking as the Central bank of Nigeria (CBN) hiked its benchmark interest rate to 13 percent in a bid to protect the naira.
The Debt Management office (DMO) sold N53.50 billion naira ($289.97 million) worth of sovereign debt at an auction last Wednesday, where yields climbed more than 200 basis points across the board, to an average of 15.39 percent with maturities ranging between 3-year and 20-year.
“Such elevated rates will need to persist for longer, if not increase further, to boost the incentive to hold NGN assets,” said Samir Gadio, Head of Africa Strategy, FICC Research at Standard Chartered Bank, in a December 19 note.
The Nigerian economy which gets 70 of its income and 95 per cent of foreign exchange from crude oil sales is particularly vulnerable form the almost 45 percent slide in crude prices this year.
Brent for February settlement closed trading at $59.27 per barrel on Thursday, on the London-based ICE Futures Europe exchange, the lowest close since May 2009.
The 2015 budget is based on a benchmark oil price of $65 a barrel.
The debt service budget is equivalent to 21.62 percent of the entire 2015 budget of N4.36 trillion.
Analysts say a combination of higher interest rates and falling crude oil prices portend a slowdown in consumer spending next year.
“Further upside risk to interest rates and the potential removal of the fuel subsidy imply that 2015 has the potential of being a tougher year for the consumer than 2012,” Renaissance Capitals SSA economist Yvonne Mhango, said in a Dec. 01 note.
“We expect the cement industry to see a softening in demand as capital expenditure slows on the back of restrictive fiscal policy and a higher interest rate environment,” Mhango said.
Dangote Cement Nigeria’s largest company by market value has lost -26.94 percent this year, Lafarge Africa is down -34.89 percent while Nestle the largest listed food company is down – 32.57 percent.
This compares with the -29.08 percent fall in the benchmark NSE –ASI.
While the N9.13 trillion ($49.3 billion) total debt outstanding (September 2014) is relatively low at 11.3 percent of Nigeria’s N80.2 trillion economy, excluding AMCON bonds, the cost of rolling over that debt may further increase in 2015 as foreigners retreat and local pension funds demand higher yields.
Standard Chartered estimates that foreign holdings of Nigerian T-bills and bonds are now below $6bn, down from $8.5bn in October 2014 and a high of $11.7bn in September 2013.
“We see debt benefiting from higher rates, at the expense of equities,” Mhango said.
Latest data from PenCom show PFAs are underweight equities with only 12.95 percent of assets allocated to domestic stocks as at October 2014, compared to 61.81 percent in FGN fixed income securities.
