Why Nigeria might pay more on future Eurobond offerings – Akpata
Mr. Egie Akpata is Chairman of Skymark Partners Limited, a Lagos-based company. He worked at BMO Financial Group in Toronto; Deutsche Bank AG in New York; United Capital PLC and UCML Capital, of which he is a director. Akpata has completed transactions in the debt and equity markets, as well as mergers and acquisitions worth more than 2 trillion naira over the past 12 years. He is an active player in local capital markets and a regular contributor to CNBC Africa. In this interview, he explains the key drivers of current developments in domestic and global debt markets, including why future Eurobond offerings may cost Nigeria more.
OWhat is your view of the government’s budget deficit and debt service burden, especially with the indefinite postponement of the removal of fuel subsidies? What will be the involvement of Nigeria with a budget deficit of 3 to 4% for the next five years?
The absolute size of the fiscal deficit and the debt service burden are expected to continue to grow in nominal Naira terms. The extension of the fuel subsidy scheme only increases the size of these deficits. What these numbers will be as a percentage of GDP depends on the ability of government policies to stimulate economic growth.
While we all know that Sovereign Notes are risk free instruments and many analysts would argue that the Nigerian government cannot default on a Naira obligation, and the worst would be to print more Naira. What are the chances that the government will find itself in such a situation, especially with an already high inflation rate?
I do not see a situation where the FGN would restructure or default on any of its naira debt instruments. The implication of such action far outweighs the costs of other measures available to the FGN to avoid such action. For example, they may simply issue new debt to service existing obligations.
The same goes for FGN Eurobonds. The current interest cost and maturities of these bonds are well below the FGN’s current and future means of repayment. Even though FGN cannot print USD to service these bonds, the market view of FGN credit remains very positive.
With the end of the 10-year tax holiday on corporate bonds and the government’s readiness to fully revert to the tax provision, how do you see the growth of corporate debt issuance? Can it be sustainable or is it simply seen as something that would force issuers back to relying solely on short-term bank loans?
Everything indicates that the corporate bond transaction pipeline is very solid. It is likely that many issuers are more concerned about access to the bond market ahead of an election-induced downturn in market activity than about the tax implications of the tax holiday expiring.
Short-term bank loans do not replace fixed-rate, long-term bonds. Most issuers are not prepared to take on the refinancing risk associated with short-term loans. There is no guarantee that the facility will be renewed or that the interest rate on renewal will be affordable.
However, if corporate bonds become taxable, issuers will have to pay significantly more to make their instrument competitive with tax-exempt FGN bonds.
Won’t this policy halt the progress made and undermine the depth of Nigeria’s debt capital market, which even remains largely dominated by the issuance of federal government bonds?
The dominance of FGN bonds in the market is partly due to the sheer size of FGN, its increased borrowing needs in recent years, and the constant issuance of paper throughout the year. This dominance has been with the market throughout the 10-year corporate bond tax exemption.
I believe that having benefited from the bond market, issuers will look beyond the additional costs due to taxes and continue to access the market even if it costs more. The benefits of getting long-term, fixed-rate financing are too great to ignore.
With the indicative rise in policy rates in the US, UK, Canada and other developed markets, global interest rates soared and Eurobond yields rose accordingly. Will this trend not jeopardize the foreign currency loans proposed by the Nigerian government?
Volatility in the Eurobond market is a recent event – and rates have fallen significantly over the past two weeks. However, rates are now much higher than in September 2021, when the FGN issued $4 billion in Eurobonds. As market nervousness subsides, it is very likely that the FGN will be able to access this market for a significant portion of its N2.57 tr foreign borrowing component which is not funded by the DFIs. However, the price of an FGN Eurobond today will be 1-2% higher than what was paid in September 2021, when rates were below the historical trend.
The FGN remains a very strong credit in the Africa Eurobond space and its external debt service is relatively low compared to its African peers.
The Nigerian government has a notable depreciation refund on its books between this year and 2023, and incidentally may be market shy due to the rate environment. Won’t this put pressure on the external reserve and force the CBN to further devalue the naira?
I’m not clear on the amortization in question. As far as I know, there is a $300 million Eurobond due later in the year. This is unlikely to cause a major drop in foreign exchange reserves, which currently stand at around $40 billion.
The MPC continues to demonstrate its pro-growth sentiment by keeping policy variables unchanged despite concerns over rising interest rates in the global market and renewed concerns over inflationary pressures. How long do you think the MPC can maintain this position?
Negative real interest rates are not unique to Nigeria. Most developed markets have very negative real rates to date. US inflation is 7%, but the 10-year US Treasury is at 1.9%. This, on a relative basis, is much more negative than in Nigeria where inflation is at 15.5% and the 10-year bond at 12%.
MPC policy variables are relatively high at this stage of the economic cycle. Also, the CBN has other ways to control the money supply beyond the MPR and other MPC variables. The data suggests that the CBN’s pro-growth sentiment has been effective in pulling the Nigerian economy out of the COVID-induced recession.
Some experts are skeptical of China’s bilateral loans and some argue that if Nigeria defaults on its obligations to ‘Asian mafias’ the country could lose control of some national strategic assets, among other views, do you share also this feeling?
I am not aware of any national strategic assets pledged to China under a loan agreement. If such cases exist, it is unclear how the Chinese lender will be able to enforce these rights in Nigeria. No lender is disbursing funds pending default, so it’s safe to assume that the Chinese have done their homework on FGN’s ability to repay these loans before granting them.
It can be argued that project loans are a positive development because it is easy to see exactly what the loan was used for. Compared to FGN Naira bonds or Eurobonds where the proceeds are mainly used to support the budget which is mainly recurrent expenditure.