More a foothill than a debt mountain

Nigeria enjoys enviable sovereign debt indicators. They look nice on paper but, more importantly, form part of the strong external balance sheet which helps to explain why high waves, and not storms, have hit Nigeria from time to time as a result of the global headwinds. The Debt Management Office (DMO) reports that the total debt of the FGN at the end of June amounted to N8.88trn (US$54.8bn at current interbank rates) , equivalent to just 11.1 per cent of revised GDP for 2013.

We hear sarcastic remarks that the indicators were made possible by debt cancellation. Certainly the agreements with external creditors transformed the ratios but they were not unconditional gifts. The FGN had to get the seal of approval for its policy from the international community, and there was also a buyback element in the accord with the Paris Club.

We would add that the FGN could have thrown away its “gift”. The public debt burden of Ghana is now higher as a percentage of GDP, which was adjusted upwards by about 60 per cent in 2010, than it was before its external debt relief in 2005. Fiscal policy in Nigeria has many flaws and scores poorly for transparency yet the FGN is not in the habit of running up double-digit budget deficits around elections. It may well have avoided this trap more as a consequence of constitutionally-based fiscal federalism than due to its budget discipline but the end result is the same.

 This is the ratio for sovereign obligations so we have to make some estimates to arrive at the public debt burden. The ratio covers the external debt of the state governments because it is FGN guaranteed. We have to allow, however, for their domestic obligations: the DMO puts their domestic debt at N1.55trn at end-2012, and the CBN their bank borrowings at N760bn in April (2014.

The going starts to get tough when we make estimates for the public agencies. Legacy debts could be the easy part because some figures have been calculated outside the organization for a specific reason (ie the FGN was looking to divest).  The Nigerian Electricity Liability Management Company inherited the estimated N800bn debts of the unbundled PHCN. Nigerian Telecommunications, which is currently for sale under a guided liquidation, is said to have debts of N400bn, mostly to suppliers.

We then come to the NNPC. It has been audited several times although the results have not been formally released in public. Remi Babalola, the minister of state for finance, was moved to special duties by the presidency in August 2010 after commenting that the corporation was “insolvent”. This followed a meeting of the FAAC at which the monthly discussion of the NNPC’s payments into the federation account was more than usually heated. There is no basis upon which to estimate its net debts to the FGN, suppliers and banks. The current version of the petroleum industry bill in the National Assembly would not represent much of a step forward in terms of transparency, at least for the unincorporated joint ventures with oil majors.

Finally we have to mention AMCON, while recognizing that its bonds are predominantly held by another public agency (the CBN). Its ability to service its debt hinges upon its recoveries. The sovereign debt burden of 11 per cent of GDP becomes perhaps 25 per cent when we incorporate state governments, legacy debts, the NNPC, other public agencies and AMCON. This is very much our worst case scenario.

This is a light burden by any criteria. The latest sovereign credit rating to emerge from the sub-region is the B1 for Côte d’Ivoire’s long-term, foreign currency obligations from Moody’s last month.(B1 is the equivalent of B+ with Fitch and S&P, and so one notch below Nigeria.) The agency puts Ivorian public debt at 35 per cent of GDP. It does not include obligations known as C2D under a French debt relief programme  and we doubt that the figure covers opaque transactions of the type we have identified for Nigeria.

In one respect, however, the structure of Ivorian public debt offers a way forward for Nigeria. It is divided 50/50 between domestic and external obligations although the former are in reality convertible by virtue of the CFA franc peg to the Euro. The medium-term strategy of the DMO, unveiled in May 2013, sees a 60/40 blend as appropriate for Nigeria.

We calculate the mix as 84/16 as at end-June. The FGN could have pushed the ratio a little closer towards the objective by tapping the Eurobond market this year. It chose not to, and will have seen the favourable pricing of issues by African sovereigns rated one notch below Nigeria (Côte d’Ivoire, Kenya and Senegal). This was an opportunity missed in our view although a small diaspora bond is to be launched to raise up to US$300m.  We realize that the pricing differential will not be always as favourable to external issuance as today. Yet we also note that more than 70 per cent of sovereign external debt is due to multilateral agencies on concessional terms, and that Nigeria’s promotion to middle-income status does not close the window to such financing.

So the debt indicators are enviable, however they are calculated. There is a theory that the combination of the new national accounts and the forthcoming elections will encourage a massive borrowing binge. Our take on thinking within the federal finance ministry and the DMO suggests otherwise.

Gregory Kronsten