Lagos (INVESTADVOCATE) Peter OBIORA, Online Editor at InvestAdvocate captured a Question and Answer Session with Abraham Nwankwo, Director General (DG) Nigeria’s Debt Management Office (DMO) at the recently organised retreat for financial and investment journalists in Lagos Nigeria. Excerpts:
What did you do to be able to sell the $1.0 Eurobond to the International Community?
The job was done by Nigerians, investors looked at the fact that the transformation agent of President Goodluck Ebele Jonathan is on course, they looked at the various components of the various sectors and saw what the government is doing in agriculture and the fact that the distribution of fertilizers, seedlings and other inputs had been rationalized and made very efficient and they are reaching the real farmers.
Also, the fact that the power sector has been successfully privatized and we are at the threshold of private sector power led initiative that will ensure adequate and stable supply of electricity. A look at the infrastructure transformation going on; especially roads, the fact that the railway lines have been revitalized and some lines have started operating and more are underway to be reactivated. Also, look at the dramatic changes that have taken place in the aviation sector and with our airports.
They looked at the fact that in terms of institution building, a lot has happened. For example in public debt management in Nigeria, efforts have been made over the couple of years to ensure that not only the federal government; but every state of the federation has a functional debt management department.
When they look at all these as part and parcel of the transformation agenda of his Excellency President Goodluck Ebele Jonathan, they came to the conclusion that the Nigerian economy is doing well and that its on the right part and if we continue the way we are going, there is no doubt that in the next five (5) to seven (7) years, Nigeria would have arrived at a stage where it would be so obvious to everybody that we have left the group of underdeveloped countries and more importantly, they are looking at the various measure government is taking to ensure that the growth process is inclusive.
We are in the process of growth; we have been registering very credible growth rates in the world over the past five (5) or more years, the current efforts being made by government to ensure that the growth process is inclusive like I said earlier is generating maximum employment and poverty reduction.
These are the things that private investors allover the world are taking into account. Of course when we went to sell the bond under the leadership of Dr. Ngozi Okonjo-Iweala, the coordinating minister of the economy and honourable minister of finance, we told the Nigerian story as forcefully and as factual as we could.
All aspects of the Nigerian economy including, politics, agriculture, banking, infrastructure, human resources and media. We told all the stories about Nigeria effectively with facts and figures and it was obvious to the international investors that Nigeria is on the right path; essentially we are crossing the threshold and that Nigeria given its potentials has eventually come to terms and we have taken advantage of those potentials transforming them so that it will lead to welfare for the generality of the Nigerian people.
Looking at your efforts to create a flexible market and considering the variety of debt instruments you have inline with the medium term strategy, when do we expect to see some of these products?
Some of the products are already coming in the near time; some will be in the medium term. For example the Global Depository Note we talked about which is a way of encouraging special classes of international investors who would not invest directly in the domestic bond market except through a depository arrangement, this is likely to come on stream before the year ends as approved by the national assembly.
The inflation linked bond, we are working on it and we believe in the near time it will come to friction. The other flexibility arrangements we talked about including the securities lending certainly will come on stream before the end of the first half of 2014. So, many of these measures, the concrete new products as well as the flexibility instruments are coming in the near to medium term.
FACTS CHECK:
”Inflation-linked securities are a relatively recent innovation in the debt markets that began with the introduction of Treasury Inflation-Protected Securities (TIPS), first for sovereign states and then for corporations, with the first inflation-linked corporate notes offered in 2003 in the US.
While a dominant fraction of inflation-linked debt is issued by sovereign states, there has been a recent interest amongst various state-owned agencies, municipalities but also corporations, in particular utility or financial-services companies, to issue inflation-linked bonds”.
Source: edhec-risk.com
As at December 2012, you said that foreign investors holding of FGN securities amounted to $5.1 billion, can we have a more updated figure?
We are used to emphasizing statistics that our public debt is so much, and that is why we are focusing on talking about what are the benefits to the Nigerian economy particularly through the private sector that derive from these beautiful statistics we talk about.
So is it good enough to tell Nigerians our debt is so much? We have been explaining to financial journalists these statistics, what are the opportunities in real term embedded in them that will translate to good standard of living for our people? That’s why our emphasis is on pointing out the opportunities we have created for the private sector so that they will issue their own debt instrument in the markets.
We have developed this so that they can raise long term money to invest in the real sector of the economy and in infrastructure, by so doing, they will create jobs for our teeming population and it will lead to more income in the society; because for every Nigerian who earns income by being gainfully employed, you know that there are many other dependents relying on that person, so there will be spread in welfare and reduction in poverty.
What is the most current figure of total government debt?
Our focus now is not talking about figures, yes let me say in summary that our debts as usual remain sustainable, and the statistics are available. However, it’s not an issue of statistics, over the past seven (7) years, we are one of the least borrowed countries in the world in terms of statistics; government has continued to emphasis from the public debt management point of view that yes our debt is sustainable.
All of us should appreciate there is the need for us to diversify our economy because we are overly dependent on oil revenue for driving our economy as a source of foreign exchange and revenue for government and there is need to diversify that. So, the focus is on diversifying the sources of revenue for government. If we do this, we will observe that beyond the statistics, our debt will even be more sustainable instead of depending on oil and gas for about 80%.
For instance if we are dependent on oil and gas for about 30%, while we also depend on revenue from agriculture. Yes agriculture is the biggest sector in the economy; but it’s high time we operate it in such a way that many of our farmers will be so productive and competitive and are exporting their products; including the processed ones in particular and as they export them, government earns income in terms of duties; while the farmer also earns more income, in that way, our economy will be diversified both for the private sector and as a source of revenue for government and our debt will therefore be more sustainable. Yes our debt GDP ratio is still below 21% currently.
Now in terms of participation of foreign investors, in the wake of the global financial meltdown, and because of Ben Bernanke, chairman of the Federal Reserve, central bank of the United States statement that quantitative easing is going to taper because there is a believe that the US economy is getting better; following this statement, investors allover the world started recalling their investments wherever they were in anticipation for higher yields so they could also diversify their investments into the US economy to take advantage of it.
So you could expect that the level we achieved in 2012 has come down to anything around five (5) and seven (7) percent; but certainly we are not in a position to stabilize yet, allover the world, if you listen to the financial market from the CNBC or Bloomberg, you will appreciate that recently, the additional reports coming from the US shows that their economy is getting better to the extent that there was a huge drop in the unemployment figure which is positive for the US economy.
For the fact that it’s positive for the US economy means that for investors, there is a higher prospect that they can earn more by investing their money in the US economy, therefore, it’s a time for them to wait a little longer, hold their money and take advantage of the positive development in that economy.
The global economy in respect of that stimulus from the US economy in terms of possibility of the quantitative easing being drastically reduced, that intermediate period is still on and I guess it will take us up to the next two (2) or three (3) months to be able to settle at the new level.
Recently the IMF raised Nigeria’s borrowing threshold, what does that imply for the economy?
The IMF didn’t raise Nigeria’s borrowing threshold, maybe indirectly, countries are classified in various groups, so Nigeria belongs to a particular category and because of change in Nigeria’s per capita income, it has changed categories and the one in which it belongs is allowed technically to borrow up to 56% of our debt GDP ratio without raising eyebrow in terms of credit worthiness just as it’s much higher in developed countries.
So, it’s an appreciation from the point of view of those global financial institutions that Nigerian economy is moving to the next level and in doing so, it has been reclassified in terms of its capacity to borrow.
However, Nigeria’s President, the coordinating minister of the economy and the debt management office has made it clear that in spite of that technical space created, Nigeria will continue to be conservative in its borrowing as if nothing has really happened in terms of more space for it, so Nigeria will continue to be prudent and to continue borrowing as if its using the old limits, because the emphasis is not for government to do more borrowing, but to create space for the private sector to do the borrowing and that is why the theme of our interaction was on the opportunities created for the private sector from debt management achievements so they are now being encouraged based on the benchmark created in the international capital market we have developed domestically, the private sector is now being challenged to take advantage and be the borrowers to invest in agriculture, solid mineral, infrastructure and so on.
On diversification of instruments and investors base, what are you doing to tap into the global alternative market like the Sukuk and others?
Government is already working on alternative financing sources and generally the non-interest financing products including the Sukuk. Just last week there was a workshop in Abuja organised by the Africa Development Bank (ADB) which involved other African countries and we deliberated on how to go forward, so Nigeria is seriously working on establishing the necessary frameworks for tapping into alternative sources of funding; including Sukuk like I mentioned earlier.
Nigeria is going to take advantage of all available and appropriate sources. At the Abuja forum, I did say that it should not be taken that developing alternative financing should be restricted to government just as in the conventional debt instruments whereby we are encouraging the private sector to take advantage. We are also for the non-interest financing including Sukuk, while encouraging the private sector to play the lead role, its not for government to start issuing sovereign Sukuks, at the appropriate time, they will do that, the private sector should understand this new financing alternative so they could take advantage of this.
Is there a possibility of providing enhancement for Nigerian Companies?
There are various credit enhancement that are already in place for instance the partial risk guaranty offered by the World Bank Group and this usually comes through the Ministry of Finance, I’m aware there are a couple of projects seeking funding through this alternative.
There are arrangements in place if some foreign investors possibly in collaboration with Nigerian partners want to invest in the country, and they need some form of political guaranty that can be accessed from the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, this is available.
Let me also mention that something related to that is the fact that the Minister of Finance has made known on a number of occasions that before the year ends, government would have established the mortgage liquidity facility which is to help the private sector be able to fund mortgages. These are some of the credit enhancement schemes in various forms.
The collaterised mortgage obligation (CMO) has made it clear in many occasions that government has obtained a $300 million from the World Bank as a mortgage liquidity facility and that is being finalised before the end of the year. So, there is a lot that the government is doing to make sure that they provide the necessary support for the private sector to overcome some of the structural constraints that they have.
On Nigeria’s N10.8 trillion 2012 revenue
Everything happens on a yearly basis and in 2013, I have raised $1.0 billion from Eurobond, like I said earlier, the government is going to use the money in providing infrastructure. We are developing a framework to make sure that there is accountability as we disburse the funds and status update will be given on work done so far.
Whether local or foreign critics no matter how highly placed wants to divert Nigeria’s attention from moving in the right direction, they begin to criticize, we are saying yes Nigeria has always had a number of deficiencies and defects, that’s true. For instance questions were put to me when I made my presentation about the power sector; everybody knows that our power sector have not done well over the past three (3) or four (4) decades.
At this juncture, is their anybody who has a better idea as a solution to what the government is currently doing as regards the power sector? Having privatized the Power Holding Company, is it the right approach to solving the power problem?
For the fact that the government has established the national electricity regulatory Commission (NERC) to now have a price structure that covers returns to all the value chains, because if we don’t do this, we will run into problems. You have to take into account from generation, transmission and distribution and find out what would be spent at the end of the day by the man who consumes electricity? Is it enough to ensure the return on investment that is expected? If not people would not invest and they would continue complaining.
What are the different things the government is doing to encourage privatization in the real sector to approach the bond market?
Its not the responsibility of the government to force the private sector, the private sector is always in a search for profit. Now what government has done is to provide that bigger framework; especially the infrastructure. Government has done the best thing it can do for the private sector as far as the bond market is concerned, government used the opportunity of the fact just like any another government it would need to borrow money from the market to fund its fiscal deficit which is what every government does and did it in the past.
The government is subjecting itself to the discipline of the capital market, borrowing from the capital market. The government didn’t simply go to borrow from the capital market, it made sure that it’s structured in such a way that it borrowed from the capital market, it developed the market for a long time fund for the private sector; so that’s the best the government can do in that particular respect and it has done so.
Government know that it also need to establish a benchmark for the private sector and it has done that successfully making sure that it succeeded in raising funds at competent coupons which will ensure that when the Nigerian companies go to raise their benchmark on the sovereign bond, go and look at other countries that has issued bond since we issued ours and what their own coupons are compared to ours.
So, government had done the best it can do as far as debt market is concerned, its permanently working with the private sector like I said earlier to make sure their various concerns are addressed whether in terms of tariffs, duties, infrastructure, the private sector does make proposal to the government on what to do so as to make sure there are appropriate infrastructure. However, the private sector is encouraged not to abdicate its own duty because in every economy we have three agents; we have the household, firms (private sector) and the government that can work on its own while interacting with others.
Go and monitor all the countries in world over the past 10 years, there are few countries that have achieved the type of macro economic stability that Nigeria has achieved and that’s one of the major things our private sector requires, a stable macro economic environment and I’m sure if you conduct a research of countries in the world that has achieved high level of macro economic stability, Nigeria is amongst the first 20.
Also, amongst the emerging market economies, Nigeria is on the top five (5) lists. These achievements were as a result of government deliberate policies in terms of monetary, fiscal, public debt management, exchange rate and banking policies. These are some of the things that government have done collectively to make sure that the economy is relatively stable, but if government has not been performing optimal as it has done in the last two (2) or three (3) years, we will not have been doing as well as we are doing now.
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