Nigeria: Cautionary signs on debt

Looking to continue its trend of major capital expenditures, the Nigerian government is planning a debut international bond sale. However, the country’s debt portfolio has reached an all-time high, and some are cautioning that Nigeria scale back borrowing.

Nigeria’s $500m, ten-year Eurobond issue will happen before the end of 2010, according to the Debt Management Office (DMO). The placement is in line with the nation’s Vision 2020 strategy to become a financial hub by 2020, and will serve as a benchmark for Nigerian firms to access the international market. The DMO has indicated that 14 companies are preparing debt issues after the government’s global bond sale.

Prior to the financial crisis, the government had been mulling a $1bn initial bond issue, as investor interest is thought to be high. At a news conference on November 2, DMO Director-General Abraham Nwankwo predicted, “We will raise the bond very comfortably. The $500m is very small compared to what we do every month on the domestic market.”

However, in November, the DMO released figures showing that Nigeria’s debt portfolio was at an all-time high of $32.5bn, up 21% from December 2009. Around 86% of this debt is domestic, as states have been borrowing heavily internally to finance much-needed infrastructure projects. Private-public partnerships are increasingly being used as a tool for the development of infrastructure nationwide.

“Presently, our external debt stands at $4.5bn; domestic debt is valued at over $28bn and is rising,” local press quoted Ehigie Uzamere, chairman of the senate committee on local and foreign debts, as saying. “National and sub-national governments are going to the capital market to borrow for development projects and finance budget deficits.”

At around 16.8% of GDP, Nigeria’s public debt is still low compared to other nations. The US, for example, has a debt-to-GDP ratio of 88%. Fitch ratings agency has acknowledged that, “Nigeria has a strong fiscal debt position, despite the sharp deterioration in budgetary performance since 2009.” The federal government had released figures indicating that in the first eight months of 2010, the deficit was N122bn ($807.2m) higher than anticipated.

Still, some are worried that Nigeria will backslide into the position it occupied last decade as a major world debtor. One of the chief accomplishments of Olusegun Obasanjo’s administration was settling most of the country’s external debt – the Paris Club, a group of the world’s main creditor countries, allowed Nigeria to pay off roughly $30bn at a 60% discount in 2005 and 2006.

Former finance minister Ngozi Okonjo-Iweala, who was instrumental in the Paris Club negotiations and is now a managing director at the World Bank, has recommended that the government to reduce its domestic debt so that private sector lending is not impeded.

In an interview with local press, Okonjo-Iweala said, “The external debt is very low. Nigeria has to pay attention to domestic debt and stop accumulating it. If you accumulate lots of domestic debt, you start clouding out the private sector.”

High oil prices in recent years topped the nation’s Excess Crude Account (ECA), which during the global crisis helped the economy to stay afloat. However, the fund has shrunk to around $500m from a high of $20bn in 2007.

On November 2, Fitch downgraded Nigeria’s sovereign credit outlook to negative from stable, citing political risk due the presidential elections as well as the depletion of the ECA. The country’s BB-minus rating, three rungs below investment grade, was affirmed.

Nonetheless, analysts are still optimistic about Nigeria’s first Eurobonds sale. “Ahead of its maiden Eurobond, the market implications of the Fitch outlook revision are probably limited,” Razia Khan, lead economist for Africa at Standard Chartered, told international press. The issue is a litmus test – if successful, Nigerian companies should have the confidence to access international debt markets and promote the nation’s economic growth.