Economy
Nigeria’s Borrowing Spree, Any Cause for Worry?
By Afrinvest
A new report by Afrinvest has taken a look into the recent borrowings by the Federal Government through the sale of bonds.
Afrinvest, in its weekly update, noted that much has been said on Nigeria’s aggressive borrowing spree from domestic and international capital markets since 2016, and deservedly so.
Since the start of a prolonged global oil price drop in H2:2014, the Nigerian economy has recorded a significant downturn in performance as plummeting government revenues and the resultant FX crisis dragged the economy into its first recession in 25 years.
As a result, an expansionary budget of N6.1tn was adopted in the 2016 fiscal year to boost growth and fund more capital projects, with a deficit of N1.8tn estimated for the period. No thanks to the resumption of oil militancy in February 2016 and substantial underperformance of non-oil revenue relative to projections, actual FGN retained revenue was 18.0% short of target, thus deficit widened further. In order to plug this deficit, the Federal Government embarked on an aggressive borrowing spree and this has been sustained into 2017.
To this end, the Debt Management Office (DMO) decided to alter the public debt mix by leveraging on relatively underexplored foreign currency borrowing capacity.
Multilateral loans were sought from the AFDB (US$646.6m) in addition to bi-lateral loans from the China EXIM Bank, France AFD and Japan JICA.
Following improvements in domestic investment landscape at the turn of the year, Nigeria returned to the International capital market after a 3-year hiatus, successfully raising US$1.5bn via Eurobonds and US$300.0m in diaspora bond.
On the domestic front, the DMO has continued with its monthly bond auctions and took it a step further by introducing atypical bonds such as the Savings Bond and a N100.0bn Sukuk offering closing today.
The 2017 budget is projecting another record expenditure year, with fiscal deficit estimated at N2.4tn – domestic borrowing accounting for 53.0% (N1.3tn) of the total while foreign borrowing was projected at N1.1tn.
Whilst the deficit funded expansionary fiscal policy pursued in 2016 had a positive impact of growth – as seen in GDP by expenditure numbers in 9M:2016 – it has come at a cost as public debt profile has remained on the uptrend over the years.
According to the DMO, FGN total debt stood at N10.9tn as of year-end 2015 but has risen an astonishing 48.1% in 15 months to N16.2tn in Q1:2017.
The rising debt profile is not surprising given the widening budget deficit and large depreciation of the Naira; however, the cost of servicing the mounting obligations took up more than 60.0% of revenue in H1:2016 and has become a major source of concern on debt sustainability.
The major argument for increased deficit spending is that the economy is underleveraged with a debt to GDP ratio of 20.0%, but also hard to ignore is the offsetting low non-oil revenue to GDP ratio. Nigeria’s Tax/GDP ratio is 6.0%, which is relatively low when compared to SSA peers – South Africa (26.2%) and Kenya (15.4%).
The nation’s tax collection and administration system is still deemed inefficient with multiple tax system and a high tax evasion & avoidance rate.
Despite the recent drive to increase tax revenue, not much has changed in terms of actual results. In fact, federally collected Non-oil revenue fell 4.4% in FY:2016 to N3.0tn. To their credit, fiscal authorities have doubled down on tax reforms including the recently launched Voluntary Asset and Income Declaration Scheme (VAIDS) which grants taxpayers a time-limited opportunity to regularise their tax status without penalty.
However, with the economy challenged, the odds of significantly boosting Tax revenue in the near term is slim and we expect budget deficits to remain high for the next 2-3 years. What does this imply for medium term debt sustainability? Our opinion on this is a bit nuanced. The structure of Nigeria’s public debt is heavily tilted towards the domestic market (up to 77.9% of aggregate debt) and this easier to deal with in the event of a credit crisis.
Foreign debt obligations are also mostly multilateral and bilateral in nature (78.0% of total foreign debts) which are typically long tenured and granted at concessionary rate.
Thus, we do not expect a debt crisis in the near term but policymakers will need to further diversify revenue base or start deleveraging to avert one in the medium term.
Source: Afrinvest
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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