Agusto & Co: Nigeria’s Borrowing Binge, a Fiscal Time Bomb

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By Nume Ekeghe

Nigeria’s research and rating agency, Agusto & Co, has stressed the need for the federal government to address what it described as the “fiscal risks lurking in Nigeria’s deficit,” projected at over N3trillion in 2018 alone.

The firm noted that the deficit which largely goes into interest repayments (50%), salaries and pensions (63%) had led to Nigeria’s borrowing binge, pointing out that it was a fiscal time bomb for the country.

Also, in the light of the general election in 2019, Agusto & Co pointed out that that due to political risks, foreign portfolio investors would re-evaluate the country’s risk to demand higher yields or there would be a panic sell-offs.

 The firm stated this in its 2018 economic newsletter obtained recently.

It stated: “The election cycles in Nigeria lead to an inevitable elevation of political risks in the country.

“These political risks tend to rise as the elections draw nearer leading to broad sell-offs by investors (particularly foreign portfolio investors).

“Thus, in the months to come (especially in the fourth quarter of the year), investors will possibly re-examine Nigeria’s risk profile and demand higher yields to reflect concerns over elevated political risks.

“The current Kenyan narrative further dampens investor confidence in sub Saharan Africa.”

It further added: “To mitigate these risks, the central bank needs to continue with its inflation targeting monetary policies.

“Thus, easing in the first half of the year may be premature, as yield hunters will demand a premium for the higher political risks triggered by the election cycle.

“The stability of the naira will also be a key driver of the carry trade. However, the fiscal deficit at overthree per cent of Gross Domestic Product (GDP) and the uncertainty around the pricing policy on petrol will remain within investors’ radar leading to even greater uncertainty and further spiking macro risks.

 “The current debt management strategy of the Federal Government of Nigeria (FGN) has been to rebalance the debt portfolio with higher exposures to foreign debt while cutting on local borrowings.

“This has created some form of blip in the market as benchmark treasury yields on one-year maturities have dropped about 500 basis points from this time last year to between 13% – 14% now, and resulting in a negative real rate of return of about 1% – 2%.

“However, we believe that there will be some form of correction in the latter half of 2018 as yields will adjust to reflect risks levels from the macro and political environment.”

Also, while throwing more light on the increased government borrowings and debt profile, it explained: “In the interim, the drop in yields opens a significant albeit short window of opportunity for issuers seeking to raise fixed income debts.

“We do not consider the swapping of local debts for foreign debts as a sustainable long term strategy – thus, our conviction that there will be some form of correction to reflect risk levels.”

In addition, it stated that macro reforms especially deep structural reforms often required heavy drawdown on political capital, saying such reforms if poorly communicated could result in significant political backlash especially in an election cycle.

It added: “Long-term followers of the Nigerian narrative understand the political cycle and its attendant effects on the macro-economic policy environment.

“However, the effects of having been averse to reforms especially in the 2017 window of opportunity being the midway point of this administration’s four-year tenure, implies that some tough reforms may be inevitable in this election cycle.

“The pricing of petrol is probably the most germane macro risk lurking in 2018. The current rhetoric from policy makers indicates there’s a conundrum on the petrol pricing issue.

“Failing to deregulate when oil prices fell below $40 a barrel was a big miss. But even failing to divest from the refineries in the early days of this administration was an even bigger miss, because tough decisions now have to be taken on these key issues at a less opportune time.”

 It further stated: “Nigeria will once again have to fritter away all the gains on the crude oil price rally if it fails to deregulate this time around.”