Fitch, Nigeria differ on Eurobond refinancing risk

ALTHOUGH, Nigeria’s Debt Management Office (DMO) said its main objective for issuance of $2.5 billion Eurobond and embarking on debt restructuring is to reduce the huge interest burden on debt servicing caused by high interest rates in the domestic market, Fitch Rating Agency believes it might not completely work that way.

Nigeria through the DMO, planned a reduction and substitution of expensive domestic short term debt with cheaper long term foreign debt.

But the rating agency said Nigeria’s debt service cost and refinancing risks will rise as a result of currency depreciation with the issuance in the first quarter.

In a report titled:  “Sub Saharan Africa sovereign debt steadies but refinancing risk may rise”, the global rating agency said borrowing in foreign currency in international markets also exposed countries to foreign exchange refinancing risk and a potentially higher debt service/Gross Domestic Product (GDP) burden in the event of local currency depreciation.

“Thus although it can appear cheaper if domestic interest rates are high, as in Nigeria, which used the proceeds of its February issue to refinance more expensive naira-denominated debt, it generally involves a net increase in risk, in Fitch’s view,” it said.

However, there are demands on the monetary authorities in certain quarters for a reduction in interest rate, will even worsen the situation.

According to the agency, weak Public Financial Management (PFM) could increase the challenge of transitioning from concessional to commercial funding, and of managing the associated risks, such as exposure to tighter global monetary policy and the capacity to navigate interest rate and currency risks.

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It however, said that the rise in debt since 2011, growing use of commercial funding, and in some cases currency depreciation have increased debt servicing costs in some countries.  It said seven of the 18 Fitch-rated Sub-Saharan Africa (SSA) sovereigns had general government interest payments/revenues above 15 per cent last year, the highest since at least 2000.

Checks reveal that N1.76 trillion was earmarked as interest payment on  domestic public debt in addition to interest on external public debt of N254 billion.

Statistics available from the Debt Management Office have shown that the Federal Government has spent a total of N3.72 trillion to service local debts in the past three years. According to latest statistics made available by the DMO, the Federal Government spent a total of N1.48 trillion on actual debt servicing in 2017. With N1.23 trillion and N1.02 trillion spent on domestic debt servicing in 2016 and 2015, respectively, these add to a total of N3.72 trillion in the last three years.