Economy
Moving Towards Debt Sustainability
By FSDH Research
The drop in government’s revenue in the face of the rising government expenditure has led to an increase in Nigeria’s public debt (external and domestic debt).
Consequently, the ratio of debt service-to-revenue has reached unsustainable levels. The Debt Management Office (DMO) in its 2016 Debt Sustainability Analysis (DSA) report notes that the debt service-to-revenue ratio (external and domestic debt service) of the Federal Government of Nigeria (FGN), excluding states and local governments breached the country’s specific threshold of 28%.
However, the FGN is taking steps towards debt sustainability by diversifying its debt profile through the issuance of the FGN Savings Bond, Diaspora Bond and Sukuk.
Additionally, the DMO disclosed that the FGN plans to refinance domestic debt, particularly the high cost Nigerian Treasury Bills (NTB) by issuing US$3bn in foreign debt of longer tenor. The planned refinancing is in line with the debt management strategy of the FGN for 2016-2019, with the overall objective of reducing its total cost of borrowing to achieve the country’s strategic target of an optimal debt mix of 60% and 40% for domestic and external debts, respectively.
Our analysis of the data from the DMO as at June 2017 shows that Nigeria’s total debt stock stood at N19.64trn, representing an increase of 13.12% from the December 2016 figure of N17.36trn.
A breakdown of the debt stock shows that external debt accounted for 23.44% (N4.60trn), while domestic debt stock accounted for 76.56% (N15.03trn).
If the DMO were to move the external debt position as at June 2017 to the planned optimal level of 40%, it means that it would have to refinance N3.25trn of the local debt in favour of the external debt.
Looking at the FGN’s debt structure, the domestic debt component stood at N12.03trn as at June 2017. NTB, which is the short-term debt, accounted for 30.77% or N3.70trn of the domestic debt of the FGN. This is higher than the target of 25% under the debt management strategy.
Consequently, the FGN is likely to replace the short-term debt with long-term debt to achieve its debt structure target. The planned restructuring of the debt stock of the FGN will result in a reduction in the average weighted cost of borrowing.
This reduction in the cost of borrowing will be as a result of lower interest rates in the international market and a reduction in the holdings of high cost NTBs.
The average yield on the 364-Day NTB from January till September 20, 2017 is 22.50% compared with the average yield on the FGN 6.375% July 2023 Eurobond of 5.85%.
Following the FSDH Research report issued on August 28, 2017 titled “A Drop in the Nigerian Treasury Bills Yield Imminent” the yield on the 364-Day NTB dropped from 22.72% in August 30, 2017 to 20.47% on September 21, 2017. The yield on the FGN Bond has also dropped in the market.
The total amount of domestic debt service in 2016 stood at N1.20trn and represents 58% of the federal allocation disbursed to the FGN. As at June 2017, the total domestic debt service stood at N684.45bn, representing 62% of the total FGN allocation of N1.10trn for the period. This represents an improvement from total domestic debt service as at March 2017, which stood at N449bn representing 82% of the total FGN allocation for the period.
We note that FGN revenue has been challenged in the last two years on account of the drop in oil revenue.
Furthermore, the fact that a significant part of government revenue goes towards interest payments means that little revenue is left for the government to undertake capital projects. The FGN needs to improve critical infrastructure in the country to increase the competitiveness of the economy to attract investments and maintain economic growth.
This effort coupled with the current tax reform of the FGN, will increase revenue accrued to the government and improve the debt service-to-revenue ratio. As the yields on the FGN securities continue to drop there will be opportunities for more activities in the corporate bond market.
By Dipo Olowookere
About 0.04 per cent was recovered on Friday from the loss recorded by the Nigerian Exchange (NGX) the previous due to profit-taking.
Yesterday, investors were in the market with renewed vigour, mopping up stocks trading at relatively cheaper prices.
According to data, the insurance counter gained 0.41 per cent, the banking sector appreciated by 0.38 per cent, and the consumer goods index grew by 0.14 per cent.
The gains achieved by these three sectors were enough to lift Customs Street at the close of business despite the 0.26 per cent decline printed by the industrial goods segment and the 0.14 per cent loss suffered by the energy industry. The commodity counter was flat during the session.
A total of 43 equities gained weight on the last trading day of this week, while 26 equities shed weight, indicating a positive market breadth index and strong investor sentiment.
Red Star Express increased its share price by 10.00 per cent to N13.20, NCR Nigeria grew by 9.97 per cent to N128.55, SCOA Nigeria inflated by 9.96 per cent to N14.90, Omatek appreciated by 9.94 per cent to N1.77, and Deap Capital expanded by 9.85 per cent to N4.46.
On the flip side, McNichols decreased by 8.81 per cent to N6.00, Legend Internet crumbled by 7.56 per cent to N5.50, Cornerstone Insurance crashed by 6.48 per cent to N6.35, C&I Leasing contracted by 6.29 per cent to N8.20, and Austin Laz slipped by 5.78 per cent to N3.75.
Yesterday, 539.9 million shares valued at N16.7 billion were transacted in 48,023 deals versus the 1.0 billion shares worth N31.6 billion executed in 51,227 deals in the preceding day, implying a shrink in the trading volume, value, and number of deals by 46.01 per cent, 47.15 per cent, and 6.26 per cent apiece.
Zenith Bank was the most active for the day with 54.6 million stocks sold for N3.8 billion, Jaiz Bank traded 41.5 million units worth N359.4 million, Secure Electronic Technology transacted 37.7 million units valued at N39.2 million, Access Holdings exchanged 30.5 million units for N699.2 million, and Lasaco Assurance transacted 27.2 million units worth N68.3 million.
When the market closed for the day, the All-Share Index (ASI) went up by 72.21 points to 166,129.50 points from 166,057.29 points and the market capitalisation gained N31 billion to N106.354 trillion from N106.323 trillion.
By Adedapo Adesanya
It was a positive ending for the Naira this week after it further appreciated against the US Dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Friday, January 16 by N1.33 or 0.09 per cent to sell for N1,417.95/$1 compared with the previous day’s N1,419.28/$1.
The domestic currency also gained N2.41 against the Euro in the official market to close at N1,647.51/€1 versus the preceding session’s closing price of N1,649.92/€1, however, it suffered a N7.97 loss against the Pound Sterling in the same market window to trade at N1,901.32/£1, in contrast to Thursday’s closing price of N1,893.35/£1.
In the same vein, the Nigerian Naira depleted against the Dollar at the GTBank FX counter by N2 to quote at N1,427/$1 compared with the previous day’s N1,425/$1, but strengthened against the greenback at the black market yesterday by N5 to settle at N1,485/$1 versus the N1,490/$1 it was exchanged a day earlier.
Improved supply conditions helped keep the market within range as exporters’ and importers’ inflows in addition to non-bank corporate supply enhanced liquidity as the Central Bank of Nigeria (CBN) made no visible intervention.
Stronger external inflows from foreign portfolio investors (FPIs) and improving current account dynamics, continue to align with structural support in the wider economy.
Nigeria has seen projections of a stronger economic or gross domestic product (GDP) growth and lower inflation in 2026, with these forecasts citing improved macroeconomic fundamentals and reform impacts.
As for the cryptocurrency market, it was mixed following selloff in precious metals and lower US stocks appeared to be denting crypto sentiment.
Gold and silver, both of which also enjoyed big rallies earlier this week, tumbled 1.2 per cent and 5 per cent, respectively while key US stock indexes — the Nasdaq, S&P 500 and Dow Jones Industrial Average — all reversed from early gains to modest losses in Friday trade.
Dogecoin (DOGE) shrank by 2.2 per cent to $0.1370, Ripple (XRP) slipped by 0.8 per cent to $2.05, Ethereum (ETH) went down by 0.7 per cent to $3,228.56, and Bitcoin (BTC) slumped by 0.6 per cent to $95,086.80.
Conversely, Litecoin (LTC) appreciated by 3.2 per cent to $74.48, Solana (SOL) rose by 0.4 per cent to $143.70, Cardano (ADA) jumped by 0.2 per cent to $0.3942, and Binance Coin (BNB) increased by 0.1 per cent to $935.88, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) remained unchanged at $1.00 each.
By Adedapo Adesanya
Oil prices settled higher amid lingering worries about a possible US military strike against Iran, a decision that may still occur over the weekend.
Brent crude settled at $64.13 a barrel after going up by 37 cents or 0.58 per cent and the US West Texas Intermediate (WTI) crude finished at $59.44 a barrel after it gained 25 cents or 0.42 per cent.
The US Navy’s aircraft carrier USS Abraham Lincoln was expected to arrive in the Persian Gulf next week after operating in the South China Sea.
Market analysts noted that it doesn’t seem likely anything will happen soon. However, the weekends have become the perfect time for actions so as not offset the markets.
The market had risen after protests flared up in Iran and US President Donald Trump signalled the potential for military strikes, but lost over 4 per cent on Thursday as the American president said Iran’s crackdown on the protesters was easing, allaying concerns of possible military action that could disrupt oil supplies.
Iran produces approximately 3.2 million barrels per day, accounting for roughly 4 per cent of global crude production, so it was not a coincidence that markets rallied sharply through Tuesday and Wednesday as President Trump canceled meetings with Iranian officials and posted that “help is on its way” to Iranian protesters, raising fears of potential US military strikes that sent prices surging toward multi-month highs.
Weighing against those fears are potential supply increases from Venezuela.
The Trump administration is exploring plans to swap heavy Venezuelan crude for US medium sour barrels that can actually go straight into Strategic Petroleum Reserve (SPR) caverns, since not all all oil belongs in the reserve.
According to Reuters, the Department of Energy is considering moving Venezuelan heavy crude into commercial storage at the Louisiana Offshore Oil Port, while US producers deliver medium sour crude into the SPR in exchange.
Analysts expect higher supply this year, potentially creating a ceiling for the geopolitical risk premium on prices.
Some investors covered short positions ahead of the three-day Martin Luther King holiday weekend in the US.
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