By Peter OBIORA investadvocate

Nov 05 2010 07.41 GMT

Lagos (INVESTADVOCATE) – The Debt Management Office (DMO) has reported that 85 percent (85%) of total public debts of Nigeria is in local currency, while the remaining balances are in foreign currencies.

 

This was contained in the Report of annual National Debt Sustainability Analysis (DSA) released recently by DMO and made available to investadvocate in Lagos Nigeria.

 

The Report affirmed that the Portfolio Risk Analysis conducted by the DMO was based on three risk factors; which include currency risk, interest rate risk and refinancing risk.

 

According to Nigeria’s Debt Management Office, Exchange rate and foreign reserves have implications for the currency risk of the country’s debt profile.

 

“The profile of Nigeria’s external debt places the country at a relatively low currency risk” the Report said.

 

DMO observed that a breakdown of the foreign currency debt portfolio shows that the Special Drawing Rights (SDR) has the highest percent with 70.96 percent (70.96%).

 

While the US Dollar has 16.94%, Euro 9.21% and other currencies with 2.89%.

 

“The dominance of the SDR in the currency composition of the debt profile reduces the exchange rate risk of the debt portfolio. This is because the SDR basket of currencies which in themselves hedged against one another, thereby mitigating the currency risk” the Report said.

 

The DSA Report further affirmed that the low level of the currency risk could further be explained by the composition of the external reserves of the country which is dominated by US Dollar and the Euro.

 

The Report also notes that the composition of Nigeria’s external reserve showed that the US Dollar constituted the bulk of the reserve 80.06%, the Euro 11.01%, the Great Britain Pounds (GBP) 3.25% and other currencies 5.68%. “Thus, the currency composition of the reserve and debt portfolio indicates a very low level of currency risk” the DSA Report said.

 

On internal rate risk, the Reported noted that Nigeria’s total public debt (external and internal) is comprised of 97.9% fixed interest rate instruments and 2.1% floating interest rate instrument as at the end of year 2009.

 

“The floating rate instruments were part of the first Federal Government of Nigeria (FGN) bonds issued in year 2003 and some African Development Bank (ADB) loans in the external loan portfolio. The low level of floating rate instruments in Nigeria’s debt portfolio indicates a very low interest rate risk” the Report affirmed.

 

The DSA Report also noted that the maturity structure of the total debt portfolio is used to measure the refinancing risk of the debt portfolio. “The longer the maturity structure of the debt instruments the lower the refinancing risk” it said.

 

DMO in the DSA Report pointed out that the percentage share of the debt outstanding indicates that 79.07% of the debt portfolio is in long term instruments. “This confirms in general terms, the low level of refinancing risk in the overall debt portfolio” the Debt Management Office said.