August 14, 2017/Cower Asset
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In the just concluded week, the Federal Executive Council (FEC) on Wednesday approved the 2018-2020 Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), which projects GDP growth rates 3.5%, 4.5%, and 7% for 2018, 2019, and 2020.
The MTEF also put crude oil projection for 2018 at 2.3 million barrels per day (bpd) – comprised of 1.8 million bpd in regular crude and 500,000 bpd in terms of condensate –, projected price of USD45 per barrel and an exchange rate of N305/USD. Realisation of the projected crude oil output appears feasible by that Nigeria’s crude oil production increased month-on-month by 2.0% to 1.748 million barrels per day (bpd) in July, according to Opec’s secondary sources, while the Federal Ministry of Petroleum Resources reported that Nigeria’s average oil production, including condensates, increased to 2.06 million bpd in July (from 2.05 million bpd in June) as the country continued to ramp up production.
Nigeria’s oil output is also expected to receive a boost by Q3 2017 with the anticipated coming on stream of Pan Ocean’s 160,000 bpd capacity AmukpeEscravos Pipeline Project (AEPP) in Delta State as an alternative to the key but often distrupted Trans Forcados Pipeline (TFP).
In a related development, FEC also approved the restructuring of Nigeria’s debt profile from short term debt to medium term debt as part of its broader 2016 debt management strategy to rebalance the country’s debt portfolio in favour of longer maturing debt.
Specifically, the Federal Government intends to refinance existing treasury bills obligations with cheaper Eurobonds and thereby encourage banks to give more loans to private investors and consequently force down interest rates.
The strategy is designed to achieve, among others, a reduction in the rate of debt servicing via issuance of longer tenored but cheaper debt instruments at the international capital markets; which would free up more space for increased private sector participation in the domestic debt market.
Currently, the rate of debt servicing is rather expensive as treasury bills are priced at around 18% per cent par annum compared to Nigeria’s sovereign Eurobonds priced at around 7% per annum.
In Q1 2017, Federal Government’s revenue was 1.28 times its debt serivice given retained revenue of N608.10 billion (lower than 1.38 times in Q1 2016 given retained revenue of N587 billion).
Of the debt service obligation, interest on Treasury Bills constituted about 22% or N102.31 billion of total debt service of N475.06 billion in Q1 2017 – lower than 31% or N132.70 billion in Q1 2016.
The new debt management strategy also aims to reduce refinancing risk as it increases Average Time-to-Maturity (ATM) for the total debt portfolio to a minimum of 10 years, (against 7.15 years as at end of 2015).
Obtaining a sustainable debt profile would appropriately match liquidity requirements for long tenored infrastructural development in the country. Ultmiately, debt mixed is expected to be in the ratio 75:25 in favour of long term debt (as against 68:32 as at Q1 2017 when FGN Bonds constituted 68% or N8.17 trillion and Treasury bills accounted for 30% or N3.6 trillion.
In addition, the new strategy aims to lengthen the maturity profile of the domestic debt portfolio through reduction in the issuance of new short-dated debt instruments or refinancing of maturing treasury bills with external financing or both.
Hence, government’s medium term strategy aims to achieve an optimal debt composition of 60:40 for domestic debt and external debt respectively (against 84:16 as at end of 2015), while taking into account the need to moderate foreign exchange risk in the short to medium-term especially with regards to obligaitions to foreign portfolio investors.
Overall, we view the move by the economic managers as a positive one, especially as it is expected to enhance Nigeria’s balance of payments position, improve public sector finance, and create room for growth in the real sector amongst other things.