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Economy

Moving Towards Debt Sustainability

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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.

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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Economy

Participants Learn Money Management, Sustainable Investing Skills

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sustainable investing skills

By Aduragbemi Omiyale

Over the weekend, more than 3,000 Nigerians joined a public forum organised by the Nigerian Exchange (NGX) Limited to educate them on money management and sustainable investing skills.

The programme, moderated by US-based financial planner and author, Mr Kalu Aja, was held via a Twitter Spaces session, with the different products available on the exchange, including equities, fixed income, Exchange Traded Funds (ETFs), mutual funds and Exchange Traded Derivatives (ETDs) explained to them by the Head of Product Development at NGX, Ms Chidinma Chukwueke-Okolo.

She spoke about ETFs and mutual funds, which give investors options to diversify their investments and reduce risk in the market, listing examples on NGX.

“ETFs are low-cost passive investment schemes that track the performance of listed indices on the Exchange and help to diversify while Mutual Funds are portfolios of different investor funds pooled by a fund manager to invest actively in the market,” Ms Chukwueke-Okolo added.

She also spoke on responsible investing in accordance with the theme of Global Money Week, explaining to the participants how to access sustainable investment products on NGX.

The capital market expert informed prospective investors to watch out for the recently approved NGX Technology Board, which will feature listings from tech companies who wish to gain access to the capital market, urging investors to take advantage of NGX’s website to do their research on the market and improve their knowledge.

Also speaking, the chief executive of MoneyAfrica and Ladda.ng, Ms Tosin Olaseinde, gave practical investing tips to listeners and stressed the importance of long-term investing, budgeting and saving on financial security.

“You have to be intentional about cultivating good financial habits. Also, understand your risk appetite and diversify between low, medium and high-risk investments,” she posited.

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Economy

AM Best Affirms AXA Mansard Insurance Credit Ratings

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AXA Mansard Insurance

By Modupe Gbadeyanka

The credit ratings of a leading underwriting company in Nigeria, AXA Mansard Insurance Plc, have been affirmed by a reputable rating agency, AM Best.

The ratings affirmed were the Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating of “bbb-” (Good), with the outlook stable.

AM Best explained that the ratings reflect the strength of AXA Mansard’s balance sheet, which it said was strong.

“The ratings also reflect rating enhancement, in the form of lift, from AXA Mansard’s ultimate parent, AXA S.A,” a statement from AM Best said.

“AXA Mansard’s balance sheet strength is underpinned by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR).

“Capital consumption is primarily driven by asset risk, which incorporates the company’s substantial real estate investments,” it added.

The rating firm said it expects prospective operating performance to be supported by corrective underwriting measures in the health portfolio, as well as positive contributions from the company’s life book, affirming that the insurance company has a solid foothold in its domestic market where it ranks among the largest non-life companies, and it enjoys a leading market position in the health segment.

“With good long-term growth prospects, AXA Mansard is expected to further strengthen its competitive market position over the coming years,” a part of the statement noted.

Commenting on the ratings, the Chief Financial Officer of Axa Mansard, Ms Ngozi Ola-Israel, said “the affirmation of our ratings by an agency like AM Best lends credence to the significant improvement in our internal capital generation abilities with a strong focus on continuously improving our underwriting performance through technical excellence.”

Also speaking on the ratings, the Chief Executive Officer of Axa Mansard, Mr Kunle Ahmed, said the efforts put in place by the team to build a world-class insurance company were yielding positive results.

“The affirmation of our ratings as stable and the retention of our FSR and ICR ratings despite the exposure to the high levels of economic, political and financial system risks further testify to our strong leading position and capacity to provide security for our stakeholders and ability to protect what truly matters to them,” he stated.

AM Best Company is a global credit rating agency with over 100 years of history of providing quantitative and qualitative assessments for Insurance companies, with its Best’s Credit Rating Methodology used to determine the financial strength and creditworthiness of insurance companies.

AM Best is the world’s oldest and most authoritative insurance rating and information source.

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Economy

Over-the-Counter Stock Market Swells by N49.17bn in Week 12

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alternative stock market

By Adedapo Adesanya

The value of the NASD over-the-counter Securities Exchange increased in the 12th week of trading last week for the fifth straight week by N49.17 billion or 5.1 per cent to N1.01 trillion from N961.12 billion in the previous week.

This was influenced by the admission of Purple Real Estate Income Plc into the OTC stock market and it made it the second time the bourse was hitting the N1 trillion mark after Access Bank Plc pushed the market to that region last year.

Business Post observed that the inclusion of Purple Real Estate Income into the platform caused the expansion, but the market on its own closed weaker as the NASD Unlisted Securities Index (NSI) fell by 0.15 per cent or 1.07 points to settle at 730.37 points compared with 731.44 points recorded in the previous week.

In the week, 11 Plc lost 6.7 per cent to close at N140.00 per unit versus N150.00 per unit, Central Securities Clearing System (CSCS) depreciated by 1.4 per cent to N14.00 per share compared with N14.02 per share, First Trust Microfinance Bank Plc declined by 9.6 per cent to close at 47 Kobo per share from 52 Kobo per share, and Industrial and General Insurance (IGI) Plc shed 12.5 per cent to end at 7 Kobo per unit, in contrast to the preceding week’s 8 Kobo per unit.

On the flip side, FrieslandCampina Wamco Nigeria Plc appreciated by 1.2 per cent to N76.00 per share from N75.11 per share, and Geo-Fluids jumped by 32.4 per cent to N1.8 per unit from N1.36 per unit.

On the activity chart, IGI Plc was the most traded stock by volume last week with 45.96 million units, Geo-Fluids Plc traded 36.90 million units, and First Trust Microfinance Bank Plc transacted 4.89 million.

Conversely, Geo-Fluids Plc was the most active stock by value with N56 million, Nipco Plc followed with N9 million, FrieslandCampina Wamco Nigeria Plc posted N9 million, and 11 Plc raked in N4 million.

At the close of transactions, there was a 61.1 per cent decrease in the trading value to N88.8 million from N228.5 million, while the trading volume rose by 109.3 per cent to 88.2 million units from 42.1 million units, with the number of deals declining by 4.3 per cent to 45 deals from 47 deals.

In the year, the alternative stock exchange has recorded a turnover of 700.3 million units of securities valued at N2.60 billion traded in 735 deals.

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