WEDNESDAY, 27 OCTOBER 2010 ONYINYE NWACHUKWU  

As Nigeria plans a $500 billion Eurobond debut in the international market within the next two months, the World Bank is strongly warning that government must tread cautiously so as not to burden the nation with another debt, even though it sees the development as positive. 

The minister of Finance, Olusegun Aganga, confirmed on Monday that the 10-year sovereign bond will be issued before the end of the year, assuring that the window will provide investors with a pricing benchmark for risk capital they invested in Nigeria.He said the aim is to “ultimately reduce the cost of investment capital being channeled into the country, and to make it easier for corporate entities, including financial institutions, to have access to longer term capital which will enable them invest in infrastructure, and also lend to the real economy”.

Eurobonds are issued in a currency other than the issuer’s, as well as outside the issuer’s home country; Nigeria is one of the African nations planning to use this window to borrow money from the international capital market to finance its developmental needs, including some substantial $100 billion infrastructure deficit.The planned bond debut has, however, attracted some concerns on the basis of increased government spending, falling foreign exchange reserves and tensions ahead of the 2011 elections.

Worse still is Fitch’s recent BB- ratings of the country which observers fear could worsen anticipated outcomes by frustrating subscription and possibly lowering pricing.The World Bank is warning government to ensure that the planned borrowing is within the nation’s debt strategy and, in particular, that proceeds from the bond issue are used for the outlined purposes and not diverted to unproductive ventures.

The Bank’s Vice President for Africa and former Nigerian Minister, Oby Ezekwesili, acknowledged that the recent global financial crisis has eroded the finances of most African governments, justifying the need for them to look for alternative sources of development funding such as the Euro bonds.She however warned countries looking to adopt this strategy to ensure that the gains are maximized so as not to repeat past mistakes.

Her words: “On the bonds, I think it was the financial crisis that finally, pushed other countries which already had plans for this financing window. We actually see it as a positive development…The only thing we see is that Africa just came out of a serious debt crisis and it was through the Highly Indebted Poor Country Initiative that many of the countries were able to cancel their debts and then open the fiscal space they needed for more resources to invest in more areas that drive growth.

If, therefore, the continent does not watch it but throws itself into a debt crisis, it will be like not learning the right lessons. So, keeping a broad perspective on debt sustainability is important. It is also important to ensure that the total debt strategy of a country is as comprehensive as possible so that it can optimize the various sources of debt in a way that ensures the level of equilibrium that will not take it into debt imbalance.

So, for the countries that are going to float bonds, the important thing is: How does it fit into their overall debt strategy?”

The discipline of the market, according to her, is also important in terms of the involved governments “applying themselves to a certain level of discipline, and staying within the parameters of what they have agreed and signed up to”.

The Vice President however assured that the World Bank can, through its technical expertise, work with the government to keep a very good eye on the broader issue of debt sustainability.

 

Source: BusinessDay