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Nigeria Economy Flash Note - Will proposed debt refinancing ease servicing costs?

Will proposed debt refinancing ease servicing costs?                                                           

The Federal Executive Council (FEC) recently approved plans by the Ministry of Finance to refinance $3 billion (₦915 billion) worth of Treasury Bills (T-bills) with Eurobonds. As opposed to rolling over existing T-bills at maturity, the Federal Government (FG) will pay down the debt using inflows from the dollar-denominated borrowing of tenors as long as three years. In addition, the Minister of Finance Kemi Adeosun highlighted the attractiveness of lower interest rates on external borrowing: Nigeria’s 15-year Eurobond has a coupon of 7.8750% vs. 16.2499% on the newest issue of the 20-year domestic bond. Although we consider current domestic interest rates to be unattractive for the FG, we caution against underplaying the cost of external finance by ignoring the opportunity cost of foreign borrowing in the event of currency depreciation.                                            

Although currency depreciation will not affect dollar repayments and Nigeria’s oil revenue is a source of dollar earnings to service external debt, we highlight that the opportunity cost i.e. the naira equivalent of dollar borrowings, rises with currency depreciation. Moreover, an assessment of the attractiveness of government borrowing must be done in naira terms as this shows the true cost implications of debt for the Nigerian economy and public finances. So, although foreign borrowing comes at lower interest rates, currency depreciation could bloat the debt burden by increasing real debt servicing costs as well as the real cost of principal repayment at maturity. We note that the 2018 – 2010 Medium Term Expenditure Framework projects currency stability (at ₦305/$1) over the 3-year period but we consider this quite optimistic given the observed trend across emerging and frontier markets over the past few years as well as the lower for longer oil price outlook.                                    

Overall, whilst we consider the plan to notionally be positive for Nigeria’s debt profile, we warn that expected cost savings may be eroded by likely currency deprecation over the period. Meanwhile, the scheme may have a significant liquidity impact, barring any further adjustments made to existing monetary policy levers.