Report: Nigeria Still Vulnerable to Oil Price Shock

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 • Predicts revenue to debt service ratio of 80% by 2022

 • External debt approaching pre-Paris Club bailout levels, says expert

Obinna Chima

Nigeria will be in a vulnerable position if oil prices fall again and further borrowing becomes too expensive or no longer feasible, a report has warned.

Andrew Roche, sovereign debt expert at Finexem, an advisory group based in London and Paris, which specialises in strategic advice and financial engineering for projects and transactions in the emerging markets, stated this in their latest report titled: “Nigeria’s External Debt: The Post-Election Boomerang,” obtained by THISDAY at the weekend.

The report pointed out that after a contentious, but successful presidential and National Assembly elections in Nigeria, investors have started re-evaluating the country’s outlook.

It noted that Nigeria had taken on debt to support the economy despite a difficult external environment, adding that the country had also made some efforts for structural reform, including a more transparent exchange rate mechanism and diversification of the economy.

The report noted: “Given the recent increase in Nigeria’s external debt, Nigeria will be in a vulnerable position should the oil price fall again and further borrowing become too expensive or no longer feasible.

“The situation would worsen if available hard currency is then earmarked to support the naira and maintain import and investment activities at the expense of debt servicing.

“Investors should keep this in mind, as well as the fact that any recent debt is unlikely to be restructured given Nigeria has benefitted from exceptional debt relief in the past. In short, the external debt of Nigeria has the potential to become a post-election boomerang.”

However, the firm stressed that questions abound concerning the country’s end use of borrowed funds, the success of reforms and ongoing vulnerability of Nigeria’s fiscal position given its growing external debt burden.

According to it, “Investors are essentially questioning the sustainability of Nigeria’s new debt profile given the dependency of Nigeria on high oil prices and the oil supply caps imposed by Organisation of Petroleum Exporting Countries.

“They also question whether new borrowing has been financing infrastructure improvements, especially in the power sector, which would reinforce Nigeria’s future debt servicing capacity.”

The firm said Nigeria’s power sector requires substantial investment as reflected by the federal power sector recovery plan.

At present, Nigeria’s debt to GDP ratio is below the average of other sub-Saharan countries and analysts believe there is a moderate level of debt distress in the country.

However, Nigeria’s annual government revenues are comparatively low compared to the same countries given a large informal economy and a resulting low tax base compared to the same countries, it added.

“Debt service to government revenues is a better measure of the weight of public debt in the Nigerian economy,” the report stated, adding that “repayments of both domestic and external public debt account for over 60 per cent of federal government revenue today on average, which leaves little funding left over for capital expenditure and reform.”

It added: “The trend is also expected to get worse reaching 80 per cent in 2022. Without borrowing to finance nearly 25 per cent of annual budget, there would be no fiscal space for spending.

“As such, heavy debt servicing represents an important vulnerability in the economy and highlights how short-lived the impact of past relief has been on national finances.

“Observers may ask how Nigeria has been able to borrow so much on relatively good terms over the past years despite a weakening fiscal position and starkly lower prices for its principal export commodity. “The country’s ability to do so reflects the lack of alternative investment in the international marketplace and the hunt for yield by investors.”

It stressed the urgent need to develop Nigeria’s local non-oil sectors, pointing out that the private sector had not been able to fulfill this objective.

According to it, “In such a context, the Nigerian public sectors must walk the fine line of diversifying the economy without crowding out the private sector.

“It must also work to cut imports and incite local production of many goods. It appears, however, that the lion’s share of external borrowing has been used to support the naira when the price of oil was low and to finance sustained budget deficits.

“Key infrastructure, on the other hand, has not received enough funding or support, especially in the critical energy sector.

“This is disappointing especially given the priority given to energy infrastructure in the Federal Power Sector Recovery Plan and the dire state of electricity production in the country.”

There had been concerns about the growing debt profile of the country reaching pre-Paris Club levels.

The Muhammadu Buhari administration’s first term took up Nigeria’s Domestic Debt profile from N8.39 trillion in Dec. 2015 to N11.77 trillion in Dec. 2018.

The total public debt as at December 2018 is put at N24.4 trillion by the Debt Management Office (DMO), N16.8 trillion of which is domestic debt and N7.6 trillion in foreign loans

The foreign debt doesn’t include judgment debts running into billions of US dollars. In one case, involving a foreign company, Process and Industrial Development (P & ID), over a failed gas conversion contract dispute, Nigeria attracted an arbitration award of over $6.6billion and another interest of $3billion, which has been accumulating daily since 2017. Another arbitration award for breach of contract of over $2 billion is pending before the International Chamber of Commerce (ICC) in Paris from Sunrise Power and Transmission, a Nigerian company, related to the Mambilla power project.

Roche noted that Nigeria’s financial obligations, including the arbitration awards, amount to almost $33 billion in external debt, roughly as much debt as Nigeria accumulated prior to the Paris Club bailout.

An enforcement proceeding in a London commercial court for the P&ID case is billed for June 14, 2019. If the enforcement request is granted by the court, the nation’s financial woes might be compounded as part of Nigeria’s $45.06billion foreign reserves domiciled in Britain might be attached by P & ID to recover its arbitration award.

With an overall debt servicing (domestic/external) increment from N1.06 trillion in 2015 to N2.14 trillion in 2019, the future certainly does not look rosy for the country.