Oniha: $3bn Eurobond Success Shows Foreign Investors’ Appetite for FGN Instruments

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The federal government through the Debt Management Office (DMO) recently issued a $3billion Eurobond (in two tranches of USD1.5bn for 15yrs and USD1.5bn for 30yrs), which was oversubscribed by about 400 percent. In this interview with select journalists in Abuja, the Director-General of the DMO, Ms. Patience Oniha, who recently oversaw the highly successful issuance of Nigeria’s first Sovereign Sukuk of N100 Billion, spoke on the implications of the success of the Eurobond and its attendant effect to the economy, amongst other things; excerpts:

The government recently announced that it was going to raise $5.5billion in the international financial markets which generated a lot of interest amongst the public. Can you shed some light on this?
Perhaps, I should start by giving some context to your question by first explaining the debt strategy of the government. The DMO had for several years raised funds for the government largely in the domestic market through Federal Government of Nigeria Bonds and Nigerian Treasury Bills, and to a limited extent, from external sources mainly the multilaterals. While this had a beneficial effect of developing the domestic debt capital market, the government became the dominant issuer to the extent that it has been regularly accused of crowding out the private sector. The latter outcome was obviously not intentional, but to remedy the situation, the DMO deemed it fit to shift some of the borrowing activities to the international financial markets. This is also in line with its debt management strategy of achieving a portfolio mix of 60% domestic and 40% external. Through the strategy, the share of Domestic Debt has been brought down over 85% to 77% as at September 2017.

Now to your specific question on the USD5.5 billion. It is made up of two components, the first of which is USD2.5 billion to part-finance the deficit in the 2017 Appropriation Act. The 2017 Appropriation Act included new borrowings of N1.254trillion from the domestic market and N1.068 trillion equivalent of about USD3 billion from external sources. As at October 2017, only USD300 million in the form of a Diaspora Bond had been raised leaving an unfunded balance of USD3.2 billion. The other component of the USD5.5 billion external capital raising is the USD3 billion whose proceeds are to be used to repay some maturing domestic debt obligations.

What are the benefits of these borrowings?
The DMO‘s role in financing budget deficits as provided in annual appropriation acts, are to support budget implementation and the attainment of the government’s economic targets. The USD2.5 billion is specifically targeted at fulfilling the DMO’s mandate in this regard.

On the USD3 billion for refinancing domestic debt, there are several benefits for the action, one of which is that it will reduce the crowding out effect that I earlier referred to thereby creating more space for other borrowers in the domestic market. It also has the potential to bring about a reduction in lending rates which would make the cost of production of goods and services by the private sector cheaper and more price competitive.

Another major benefit of external capital raising is a lower cost of borrowing to government and a moderation in Debt Service Costs. As you know, U.S Dollar interest rates are much lower than Naira interest rates. The USD1.5 billion 10-year and USD1.5 billion 30-year Eurobonds were issued at Coupons of 6.5% and 7.625% p.a. respectively. These Coupons are certainly much lower than the 15% to 17% that the government borrows at in the domestic market for shorter tenured funds. There is also the fact that the USD3 billion is a direct accretion to Nigeria’s External Reserves which are extremely useful for managing the Naira Exchange Rate.

We observed that the level of subscription for the Eurobonds was over USD11 billion which was almost 400% of the USD3 billion that the government took. Can you explain the reasons for the high level of subscription and why you accepted less than the USD5.5 billion approved by the National Assembly?
The demand of over USD11 billion from international investors is a demonstration of their confidence in the policies and reform initiatives of President MuhammaduBuhari as well as the economic outlook of Nigeria. Like those investors, we ourselves can attest to the economic improvements in Nigeria as demonstrated by higher External Reserves, Stable Exchange Rate, GDP growth of 1.44% in the third quarter of 2017 and improvement in the Ease of Doing Business.
Our intention was not to raise the USD5.5 billion at once. Our first priority was to raise the USD2.5 billion required for the 2017 Budget while the USD3 billion required for refinancing domestic debt will be in a phased manner. Also, from a technical perspective, we still wanted to moderate the cost even in the International Capital Market by managing the supply of Nigeria’s Eurobonds in the market.

In a first of its kind, the government issued a 30-year Eurobond, what is the significance of this?
It is remarkable that international investors were willing to take a long term risk on Nigeria by buying the 30-year Eurobond. This feat is even more remarkable when we consider that South Africa which has a superior sovereign rating of BB- compared to Nigeria’s B+/B rating is the only sub-Saharan country that has issued a 30-year bond in the International Capital Market. The other outstanding aspect of the 30-year Eurobond is its Pricing at 7.625% which is lower than the coupon of 7.875% on the USD1.5 billion 15-year Eurobond issued earlier in the year.
In terms of its specific benefits to Nigeria, it provides the appropriate funds for financing infrastructure which is typically long term while also reducing the refinancing risk of the debt stock. It will also serve as a benchmark for local and foreign institutions who may need to raise long term U.S Dollar funds to invest in Nigeria under various PPP arrangements for infrastructure as well as privatisation.

The DMO is always borrowing in the domestic market, and now seems to want to extend this to the external market, don’t you see this as creating a debt burden for Nigeria?
It is important to state upfront and to re-assure Nigerians that the government’s borrowings are pre-approved by the Executive and Legislative arms of government and are used to finance various activities of the government as appropriated. These layers of approvals ensure that the borrowings are both necessary and scrutinised before the DMO embarks on actual borrowing. The increasing focus by the current administration of using borrowed funds for infrastructural development is a step in the right direction. As borrowing is deployed to infrastructure to promote economic growth, the benefits of job creation and increased production among benefits are good for all Nigerians.
The other part of the argument about debt becoming a burden is the issue of Nigeria’s revenue base which at 6% of GDP is not only low but well below that of peer countries. Thankfully, government’s revenue is now being given proper attention. The measures to increase Revenues are already yielding some results, and as this trajectory continues, the need for borrowing is expected to reduce while Debt Service will become an increasingly smaller portion of Revenue. The debate on debt burden should therefore shift to actively supporting the Government to increase revenue to levels comparable to the sub-Saharan average of 17% of GDP.