March 30, 2021/Proshare
By FBNQuest Research
We see from the DMO’s latest quarterly data releases that the FGN’s external debt service payments amounted to USD244m in Q4 ’20, a combination of USD101m and USD143m due to market and non-market creditors respectively. The burden is modest because about two-thirds of the debt stock is due to concessional lenders. It really should not be onerous for an oil producer generating revenue from its current quota of 1.52mbpd from the OPEC+ alliance and from condensates, which are not covered by quota. (The alliance is due to meet later this week to decide on quota distribution for May.) One argument against external borrowing, most of all from the market, is that naira depreciation adds to the budget cost of servicing this debt. Budget Office data show that this more than doubled from NGN181bn in 2017 to NGN449bn in 2019.
Another argument against it was that interest rates were higher than for domestic borrowing. This was the case in late 2020, and glaringly so in November and December.
However, there is now a c.350bps differential in favour of external borrowing by the FGN for the longest maturities. Investor appetite for sovereign Eurobonds in the EM universe has again been demonstrated by the republic of Ghana’s latest offering. We are aware that global fixed income strategists (and many others) are rightly tracking the upward trend of UST yields. This is evident from their column inches on the subject on the newswires.
Based upon annual interest and fee payments in the 12 months through to December, and the stock of external debt as at end-June, we calculate the average borrowing cost from the World Bank Group at 1.2%. Comparable figures for other creditors are 2.0% for the African Development Bank (AfDB) Group and 2.6% for Exim Bank of China.
Repayments of principal in Q4 totalled USD96m including USD53m to the World Bank Group.
Such repayments do not start until 2023 for the FGN’s drawdown in April of SDR2.5bn (USD3.5bn) under the IMF’s rapid financing instrument. It was happy to borrow from the Fund on this occasion because the loan came without conditions attached. The FGN was, however, required to make what we might term pledges of its policy intentions.
Interest payments on market debt peak in the second and fourth quarters, which reflects the issuance calendar for Eurobonds with semi-annual coupons. This is the same trend as with the naira-denominated FGN bonds.
Total external debt service (FGN and states; USD millions)
Sources: Debt Management Office (DMO); FBNQuest Capital Research
