October 29, 2018/Cordros Report
Last week, the Senate approved President Buhari’s proposal to issue USD2.8 billion worth of foreign currency denominated paper to help finance the 2018 budget. Barring an eleventh-hour backpedal, we expect the FGN to hit the Eurobond waters – anytime from now – and glide successfully, despite sustained foreign investors’ apathy towards Nigeria’s debt and equities markets in recent times.
Nigeria’s macro landscape is currently less appealing from an investor’s perspective compared with the beginning of the year – only higher crude oil price holds sway. That, together with continued monetary policy tightening in the US (which has pushed U.S long term interest rates 69bps higher YTD) and trade war concerns that have both raised bond yields across FM region, suggest that a relatively expensive pricing is on the cards. Hence, we believe the combined impact of weaker domestic picture and rising U.S yield will fuel investors’ thirst for higher yield. In any case, we look for a yield of sub 10% levels.
That said, over the past few months, concerns have been raised on the sustainability of the bourgeoning debt profile of the Nigerian government, with the IMF stressing the need to cutdown on excessive borrowing. Notably, at the end of H1-18, FGN debt stock stood at USD73.2 billion, with foreign debt accounting for 30% (USD22.4 billion) of the total, while the balance is naira denominated.
Fundamentally, the fiscal authorities need to address Nigeria’s revenue challenges. With actual revenues consistently underperforming budget. In our view, (1) approaching the debt market to finance its budget deficit could lead to spike in the yield curve – potentially sabotaging FGN’s effort to cutdown on borrowing cost – and risks crowding out the private sector and (2) the trend of capital expenditure under-implementation will persist on revenue shortages. On balance, in spite of the growing concern around debt sustainability, we believe the benefits outweigh the cost. Overall, we do not see full blown crisis, at least, in the near term
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