Nigeria: No ‘pressing need’ to restructure debt, say analysts

By Kanika Saigal
Posted on Thursday, 13 October 2022 17:27

Nigeria's Finance Minister Zainab Shamsuna Ahmed (photo: @FinMinNigeria)

Following an interview with the Nigerian Finance Minister, panic over Nigeria’s immediate debt obligations could be overblown, according to analysts interviewed by The Africa Report.

“We can safely conclude that there are no plans for any restructuring in the way that we would normally understand debt restructuring – and this is fully consistent with where Nigeria is in terms of its macro backdrop right now,” says Razia Khan, chief economist and head of research for Africa at Standard Chartered Bank, in response to remarks by Nigeria’s finance minister Zainab Ahmed during an interview with Bloomberg News.

In the interview that was broadcast on Wednesday 13 October, Ahmed spoke about how the government would look at securitisation of Ways and Means financing, which hired consultants would help them make an assessment on how to strike out repayments for longer periods, and in terms of domestic borrowing, anything maturing will be rolled over.

Ways and Means funding is a facility provided by the central bank, which allows the government to borrow from the CBN if it needs short-term or emergency finance to fund delayed government receipts or the fiscal deficit.

“To me, this sounds very much like a maturity extension – nothing about restructuring, nothing about reneging on current obligations,” says Khan. “Anyone reacting just to the headlines with little context, little understanding of Nigeria and little understanding of where the sovereign is in terms of its external credit worthiness seems to have jumped to the wrong conclusion.

“There is no pressing need for Nigeria to restructure its external debt nor do I believe there is any intent on the part of Nigeria to proceed with a debt restructuring,” she says. “I think the interviewer asked quite leading questions.”

As one investment manager based in Lagos notes, the minister should be careful using the term “restructuring” or language that implies restructuring going forward.

“When you mention restructuring, the immediate reaction by the international community is to think of ‘default’, but this can be no further from the truth.”

“I mean, she was lucky that the interview was published at market close yesterday. When I saw the news, we were thinking of shorting the market. If the interview had gone live in the morning, it would have cost a lot of money,” says the investment manager.

Debt distress?

According to the Debt Management Office of Nigeria, Nigeria’s external debt stock as of 20 June 2022, was just over $40.06bn with local debt stock at N20.95trn ($48bn).

In terms of debt servicing, the government estimates this to be 65% of government revenue in 2023. With one Eurobond maturing next year, at a cost of around $500m, Nigeria has the foreign exchange reserves – around $38.3bn – to easily cover the debt.

Nigeria’s debt profile is dangerously rising and may only be able to continue on this same trajectory for around five more years

“[…] more pressure is mounting on the capacity of [the] government for debt servicing,” says Robert Omotunde, chief investment officer at Afrinvest Asset Management Limited based in Lagos. “This is because not all government debt is captured in the official figures and the government’s ability to keep up with repayments is deteriorating.”

Ways and Means financing – which is not captured in the official debt figures – hit around N10trn by the end of December 2020. To date, this figure has doubled to around N20trn, explains Omotunde.

‘Unachievable budget target’

The government has set an “unachievable” budget target of N20trn, says Omotunde. “[…] I believe that possibly only N5trn of this can be relied on, so the government will need to borrow an additional N15trn, some of which may need to come from the Ways and Means facility once again,” says Omotunde.

While the government may be able to roll Ways and Means financing, it will limit the availability of foreign exchange into the economy, fuelling inflation and forcing the currency to depreciate further – putting much more pressure on debt servicing going forward.

“At this rate, I think Nigeria can survive on the same trajectory for around five more years,” says Omotunde.

According to the IMF, Nigeria may end up spending over 100% of government revenue on servicing its debt by 2026.

“Nigeria’s debt profile is dangerously rising and may only be able to continue on this same trajectory for around five more years,” says Omotunde.  I think we may be facing a ratings agency downgrade to junk, but the hope is that a new government next year will be able to turn things around.”

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