The PricewaterhouseCoopers estimates that Nigeria’s stock of treasury bills will be around NGN3.8 trillion by end of 2017

| By Anayo Ezugwu  |  Aug 25, 2017 @ 16:15 GMT |

THE PricewaterhouseCoopers, PwC, Nigeria, has said that the federal executive council’s, FEC, issue of $3 billion worth of foreign bonds of up to three years’ maturity to refinance maturing Naira denominated treasury bills, will have a modest impact on broad debt sustainability indicators on the country.

This decision is in line with the federal government’s debt management strategy to rebalance its debt portfolio for domestic and foreign debt, from the current 69 percent and 31percent to a targeted 60 percent and 40 percent.

Although this plan is yet to be approved by the National Assembly, PwC suspects the issuance is unlikely to be earlier than 2018, given the extensive preparatory work required in issuing international sovereign bonds. Consequently, it assumes the impact on public debt ratios will become evident as from 2018 and estimated that Nigeria’s stock of treasury bills will be around NGN3.8 trillion by end of 2017.

It said that “Refinancing $3 billion worth of maturing bills with dollar borrowing would result in a reduction in this stock by as much as nine percent. External debt on the other hand would increase by 46 percent to N6.31 trillion ($20.6 billion) by end of 2018. Under this scenario, debt to GDP rises by three percentage points, from an estimated 16 percent in 2017 to 19 percent in 2018. Nonetheless, the impact on the cost of debt is likely to be muted.

“The Debt Management Office, DMO, reports the weighted-average interest rate on debt which takes into account the proportion of instruments issued. Treasury bills account for 16 percent of total FG debts, and the portion to be refinanced is about one-quarter of treasury bill maturities in 2018. Thus, we estimate the weighted average interest rate could increase to 13 percent, in 2018 from an estimated 12 percent in 2017 and 11 percent in 2015.”

In its economic alert, PwC stated that its analysis of key debt sustainability indicators suggest that the probability of debt distress at this time is low. Among the various indicators based on the level of debt stock, it noted that external debt to exports is cited as the most useful, as exports provide the basis for debt repayments.

PwC estimated that Nigeria’s external debt to exports could rise by seven percentage points to 34 percent in 2018. This is, however, well below the threshold of 100 percent prescribed by the International Monetary Fund, IMF, and the peak of 104 percent recorded during Nigeria’s debt crisis in 2004.

According to PwC, devaluation in the currency is a key risk to external debt sustainability. “However, this risk is somewhat offset by the natural hedge provided by the high foreign currency composition of government revenues. Under a scenario of an export shock similar to the episode recorded in 2015, we assume a 44 percent decline in exports in 2018. Following this, we estimate external debt to exports will rise sharply to 71 percent, up from 27 percent in 2017. While Nigeria’s debt vulnerability worsens under this scenario, it still remains below the 100 percent threshold level – at this level, Nigeria’s external debt would need to reach $60.2 billion.”

While Nigeria’s near term public debt ratios remain relatively comfortable, the firm is mindful of the trend in debt service ratios. It estimated that debt service to revenue ratio is likely to remain elevated at 50 percent in 2018, breaching the three recommended threshold of 25 percent. PwC state that this represents the fourth consecutive increase since 2015.

Given the outlook for lower longer oil revenues, PwC expects the government to do more in mobilising non-oil revenues to bridge the fiscal deficit, to meet the objective of reducing the “crowding out” impact of domestic borrowing. “There is room for tax mobilisation as Nigeria’s non-oil tax to GDP at 2.3 percent in 2016 remains well below the average of 16 percent among four Sub-Saharan Africa countries. Similarly, the policy framework for investment incentives should be periodically assessed against intended policy objectives and revenue forgone. This would ensure that the investment incentive framework is targeted, cost effective and sustainable,” PwC said.