FG’s debt diversification strategy gradually paying off —Investment banker

THE Managing Director/Chief Executive Officer, Afrinvest (West) Africa Limited, Mr Ike Chioke has said that the Federal Government’s (FG’s) strategy to diversify its debt mix by increasing the share of foreign debt to 40.0per cent of total debt in order to reduce debt servicing cost, seems to be gradually paying off.

According to him, FG’s total debt service in financial year 2019(FY: 2019) moderated 6.9 per cent when compared year after year (Y-o-Y) to ₦2.2 trillion from ₦2.3 trillion in FY: 2018.

Choke in a weekly review made available to clients said the moderation in debt service was largely due to subdued external debt service which fell 9.4 per cent Y-o-Y to $1.3 billion.

This was driven by a 23.6 per cent Y-o-Y moderation in external commercial debt service to $787.2 million, despite increases in multilateral and bilateral debt servicing costs. Domestic debt service on the other hand also softened by 6.2 per cent Y-o-Y to ₦1.7 trillion. “Nonetheless, the FG’s debt mix is still below target with a split of 32.9 per cent for external debt in 2019 from 31.8 per cent as at 2018,” the investment bank stated.

In another development, the Debt Management Office (DMO) disclosed that the total public debt of the Federal Government rose by 12.4 per cent in one year (2019) to ₦27.4 trillion ($84.1 billion) from ₦24.4 trillion ($79.4 billion) which it was in the financial year 2018 (FY:2018).

This according to data published by the DMO last week follows a 21.1 per cent growth in FG’s borrowings to ₦23.3 trillion.

Similarly, the FG’s total domestic debt grew 11.7 per cent year on year (Y-o-Y) to ₦14.3 trillion as promissory notes surged 121.1 per cent Y-o-Y to ₦732.6 billion, driven by the Federal Executive Council (FEC)’s approval of ₦3.4 trillion new notes for the settlement of accumulated arrears.

In the same vein, total FG Savings bonds and FG bonds also rose 17.9 per cent and 12.7 per cent Y-o-Y to ₦12.7 billion and ₦10.5 trillion respectively.

According to the Chioke “As external pressures intensify it would be increasingly difficult to achieve the FG’s target. External debt issuance in the near term would be a walk on a tight rope given recent credit rating downgrade by major rating agencies.”

More recently, FG’s long term credit rating by S&P was lowered to junk status, making it even more difficult to return to the Eurobond market in the near term despite a lower interest rate environment. The case for domestic debt issuance is more compelling as the average yield on FGN bond is currently at 11.6 per cent relative to the yield on Eurobond at 12.2 per cent.

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