March 18, 2022/CSL Research
Despite rising global interest rates, a press release from the Debt Management Office (DMO) showed Nigeria accessed the Eurobond market at a time many will consider not supportive of Eurobond issuance. The country sold 7-year Eurobond of US$1.25bn at 8.375%, a premium over its dollar bonds due 2028, which currently trade at a 7.83% yield. The Russian-Ukraine crisis continues to push up interest rates, while global central banks are also raising interest rates to curb rising inflation. Many analysts see the country’s decision to raise Eurobonds under current realities as an indication of a desperate need for finance.
According to the DMO, Nigeria’s public debt as of December 2021 was N39.55trn, bringing the total public debt-to-gross domestic product ratio to c.23%, still remains within the country’s self internal limit of 40%. We reiterate, however, that despite a relatively low debt to GDP ratio, the country’s persistent fiscal spillage has resulted in debt servicing to revenue averaging 70% over the last 5 years. This makes the moderate debt level of the country increasingly vulnerable to shocks as high-interest payments continue to absorb a significant portion of federal government revenues.
Government expenditure for 2022 was estimated at an all-time high of N19.7 trillion. This spending likely reflects electioneering induced spending. The approved 2022 budget already has a deficit of N6.39trn, implying a possible increase in government borrowings in 2022 with an additional N2.56trn in expenditure earmarked for subsidy payments. As thingsstand, with oil prices at current levels, the subsidy payments stand to increase significantly above the budgeted level. Also, the Revenue projected at N10.1 trillion will likely underperform the estimate due to over-ambitious other non-oil revenue (48.6% of the total revenue), though we expect the continued economic recovery to support tax revenues.
Theoretically, the continued uptrend in crude oil prices should have been supportive of revenue. However, the perennial issue of terminal shutdowns, vandalism and thefts continue to fuel sub-optimal oil output despite the relaxation of OPEC+ production agreements. The average daily oil production for the fourth quarter of 2021 was 1.50mbpd, lower than the third quarter 2021 production volume of 1.57mbpd and news reports point to still lower production in the first quarter. The uninspiring output has been largely due to crude oil terminal maintenance, shutdown, and reduced investments. We expect more Eurobond issuance in the course of the year and an increase in paper supply as the fiscal deficit is projected to increase significantly above budgeted levels.
