June 24, 2021/United Capital Research

The FGN’s external debt service payments amounted to USD1.00bn in Q1 ’21, a combination of USD760m and USD240m due to market and non-market creditors respectively. Once we exclude the FGN’s decision to pay down the USD500m Eurobond maturing in January and therefore ease its debt profile, the burden is modest because about two-thirds of the debt stock is due to concessional lenders. This should not be a challenge for an oil producer generating revenue from its current quota of 1.55mbpd from the OPEC+ alliance and from condensates, which are exempt from quota. (The alliance is scheduled to meet next month and, given the steady pick-up in demand for crude, a further set of small monthly increases in quota appears likely.) An 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.  

The tables have since turned due largely to the huge domestic borrowing requirement in the market of NGN2.34trn this year. We now have a c.550bps differential in favour of external borrowing by the FGN for the longest maturities. The appetite of foreign portfolio investors for sovereign Eurobonds with a decent yield has been demonstrated by several issues out of Africa this year (Good Morning Nigeria, 23 June 2021). Some have been heavily oversubscribed (by four times in the case of Ghana).  

Based upon annual interest and fee payments in the 12 months through to March, and the stock of external debt as at end-September, we calculate the average borrowing cost from the World Bank Group at 1.3%. Comparable figures for other creditors are 1.7% for the African Development Bank (AfDB) Group and 5.8% for Exim Bank of China. This last figure is higher than usual, which we can trace to heavy interest payments in Q4 ’20 on its eleven separate listed project loans., 

Repayments of principal on non-market debt in Q1 totalled USD142m including USD62m to the World Bank Group and USD58m to Exim Bank.

Interest payments on market debt peak in the first and third quarters, which reflects the issuance calendar for Eurobonds with semi-annual coupons.

Total external debt service (FGN and states; USD millions)

Sources: Debt Management Office (DMO); FBNQuest Capital Research