$2.5b Eurobond: Nigeria faces higher debt cost

Nigeria’s debt service cost and refinancing risks will rise with issuance of $2.5 billion Eurobond in the first quarter, Fitch Ratings said yesterday.

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 sovereigns 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.

It said 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.

It said SSA Eurobond maturities are spread out over the next decade, but weak Public Finance Management still means there are risks associated with them. Weak PFM also means that upward pressure on government debt will persist, as it limits the capacity to implement consolidation plans and to contain spending and mobilise domestic revenue sources more fully.

It hinted that Sub Saharan Africa (SSA) sovereigns, including Nigeria, are making greater use of international debt market financing. This continued in first quarter of this year with issues from Kenya ($2 billion), Cote d’Ivoire (EUR1.7 billion) and Nigeria ($2.5 billion). Ghana’s parliament last month approved plans for a Eurobond issue.

It said that tapping international capital markets can be an important financing option where liquidity in local funding markets is low. “Long-dated international issuance can extend repayment schedules (Kenya and Cote d’Ivoire’s 1Q18 deals both featured 30-year tranches). Market access that allows for opportunistic international debt issuance is therefore beneficial for SSA sovereigns,” it said.

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 SSA sovereigns had general government interest payments/revenues above 15 per cent last year, the highest since at least 2000.

The SSA sovereign debt levels are stabilising following their recent sharp increase, but growing use of the international capital markets may increase refinancing risk as the amount of international debt coming due rises, Fitch Ratings says. Maturities appear manageable in the near term, but public financial management (PFM) in the region is often weak, meaning that capacity to manage refinancing risk is an important factor in our SSA sovereign credit assessments.

“We expect median SSA general government debt to be broadly stable this year at 52.6 per cent of GDP, following a rise of over 20 percentage point in the preceding six years. This reflects improved commodity prices and fiscal consolidation in some countries, including those with International Monetary Fund programmes.

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