Nigeria’s Debt Won’t Reduce in Foreseeable Future



Mr. Egie Akpata is the acting Managing Director/Chief Executive Officer of UCML Capital Ltd. Hitherto called Union Capital Markets Ltd, a former subsidiary of Union Bank of Nigeria Plc before Akpata and his partners acquired it in 2014. UCML is a foremost investment and advisory firm active in the debt capital markets segment of the industry. In this interview with Kunle Aderinokun, Akpata speaks on Nigeria’s money and capital markets, analysing money market instruments and bond issuances as well as the performance of the Nigerian Stock Exchange in recent time. Besides, Akpata expresses his views on the economy, investment climate and narrows down on the federal government’s borrowing and debt service to revenue, which recently reached an all-time high. Excerpts:

How has the COVID-19 pandemic affected the primary issuance market?

A lot of things have happened. I think the first lockdown started at the end of March, and the impact on the primary market has not been as much as we would have thought it would be, for a number of reasons.

First, the Securities and Exchange Commission (SEC) remained open, so did FMDQ and the NSE. So trading was still going on and primary market transactions were still being approved. A number of transactions actually happened during the total lockdown of Lagos and Abuja. So the primary markets actually continued uninterrupted.

Also, interest rates have been coming down due to the Central Bankof Nigeria’s activities in the market, and globally, central banks have been forcing rates down to try and provide liquidity for the market to survive this slow-down period. I think that has also helped here. The equity market, though, has not really seen much on the primary issuance side.

We noticed that your company’s name has changed from Union Capital Markets Limited. What necessitated the change?

Our new name is UCML Capital Ltd. Union Capital Market used to be a subsidiary of Union Bank. My partners and I bought the company from Union Bank in 2014. That transaction technically closed on December 31, 2013. In January 2014, we took control of the company. Part of the requirements of the acquisition was to rename the company. Also, we did that to coincide with our 20 years anniversary.

The company was founded in 1999, and the 20 years anniversary of the company was technically last year. We are in our 21st year now. So, in order to just reposition the company as independent of any bank, we went into a renaming process. The new name has been approved by all the regulatory authorities. And so the new name is UCML Capital Limited.

We do have one new subsidiary, UCML Investment Management Limited, which is the asset management, fund, and portfolio management arm. So, our new name is UCML Capital, and that name is what we would be using going forward.

Is the independence basically the reason you changed the name?

Well, it is primarily regulatory. It is also to rebrand and create our own identity. It is a repositioning and I think over the past five years, we have done quite a lot particularly in the investment banking space. A lot of quality transactions that have proven our capacity to perform in these markets on our own.

Despite record-low interest rates, we don’t seem to be seeing as many corporate or state bond issues as would have been expected. Why?

This problem happens any time interest rates drop very substantially. Recall this happened in the end of 2015/2016, and I can name a few other times it has happened. Most issuers miss the exact point when rates bottom out.

Let’s break the primary bond market into two parts. The state government bond market since 2015 has become quite small, for a number of regulatory and other reasons. Between 2015 and December 2019, I think Lagos State was the only state that issued a bond. So that is the challenge.

You are having a situation where, for all kind of reasons, most states can’t issue. But Lagos State did do a very large transaction, I think in February or so, to the tune of N100 billion, the largest state government bond ever.

But, you don’t see many states come to the market because of regulatory constraints around some existing laws, primarily Investment and Securities Act (ISA) 2007, making it a bid difficult for those transactions to get approved.

Again in Q1, you tend not to have many transactions from corporates, because most corporates have a December year-end. By the time their audited accounts are out and they start the process of a regulated transaction, you go a bit beyond Q1.

But a number of transactions have been coming through. Dangote Cement PLC did a N100-billion bond, you had a N100-billion Commercial Paper (CP) from Dangote Cement, MTN also issued a N100-billion CP.

These sizes have not been seen before. Never has there been a N100-billion Commercial Paper transaction, so those transactions have gone through, and there are quite a number that are coming into the market as you can see.

We closed a N10-billion bond for United Capital in May. We are closing a N10-billion bond for another merchant bank this month, and we have a couple of others that are on the pipeline. So we will be seeing more transactions, but the question is, why everybody has not tapped into the low-rate environment to refinance and re-price all their borrowings down? Sometimes, it’s just knowledge. So we may have to do more to reach out to more clients. Also, sometimes, there are other internal constraints within the issuer community. But I think we will see more transactions this year, certainly more than we saw last year.

Interest rates for all FGN instruments of all tenors are all below inflation. Why and is this a sustainable trend?

There are two parts to look at it from. First is, has it happened before? It has happened before in this market. It happened in 2016, happened in 2009/10 financial crisis. In this case, it is a reaction to a global crisis.

We do have a global economic crisis triggered by the global pandemic. And if you look at what central banks all over the world have been doing, they have been forcing interest rates down particularly on the short end of the curve. And that has dragged all rates down across all tenors. So we have a situation where, if you look at the US for instance, 10-year bond is around 0.6% per cent. It is probably sitting well below around inflation there. And if you go to Europe or Japan, they even have negative interest rates.

So that phenomenon has found its way here. There was a time when Central Bank of Nigeria (CBN) believed in positive real interest rates, interest rates above inflation. But now, they have to battle with servicing the economy, so they systematically managed the situation in the market to the point where all FGN bond tenors are now yielding below inflation. Inflation is now 12.4 per cent, and even the 30-year bond is below 12 per cent.

So you just create a challenge for investors who are trying to outperform inflation, but for a government that is having to borrow very massively to fund its operations, it’s actually a positive on the government side.

They’re reasonably trying to force people to spend money or invest in productive assets, rather than just storing your money. Because right now, your money is being eroded by inflation, you can’t even earn an interest rate high enough. It is to stimulate the economy.

On how long can it go on for? We have had negative real interest rates in many countries for five years plus, the question is, can you sustain low rates? The CBN probably has enough tools to do so, but what is the collateral damage in terms of punishing savers or encouraging capital flight??

The CBN seems to have found a backdoor way to almost isolate the exchange rate part of the market from the interest rate part. They could do this for a while, a few years definitely.

The federal government has vastly increased borrowing in this year’s budget. How is the new local borrowing impacting corporate borrowers?

I think the original budget had about N1.6 trillion total borrowing, local and foreign. The local was about N850 billion, now the local is like N2.2 trillion. First of all, the entire N1.6 trillion has been converted to local, and they have even added more.

Part of the problem started because of this pandemic. The Federal Government was supposed to go to the Eurobond market for about $3.3 billion which then was about N1 trillion roughly, and the market shutdown just before they could go out. Unfortunately, they started working on the issue in early March, by end of March, the market had shut down. So there was no opportunity to go into the Eurobond market.

In terms of the naira side the cause was technical issues around the way CBN is managing liquidity. For instance, local investors in OMO bills cannot buy OMO bills anymore. So as these OMO bills mature, they have to put the money in other federal government instruments such as bonds, or treasury bills.

So, all that money that is maturing from OMO bills, the DMO and CBN are finding a way to basically direct that money back into federal government instruments.

So as of now, federal government has met about 66 per cent of the N2.2 trillion 2020 borrowing target in local currency Given the level of bids they have received in the auctions, clearly, the liquidity is there for them get to their N2.2 trillion this year. This as far as I know will be a record amount of local borrowing by the federal government in a calendar year and because of the peculiar situation of the market, they can actually raise the money.

On its impact on corporate issuers, it is probably a positive impact from the point of view that the interest rate environment is being managed downwards so as to allow the federal government not take too much borrowing costs. The corporates who are smart enough to tag on to that wave, are able to get money out on usually low rates compared to historical averages.

When somebody is issuing a N100 billion CP at 4.9 per cent and 5.95 per cent for 6 and 9 months respectively, historically you just did not issue CPs at those kind of rates, if you go a year back. So, positive side is that it has brought rate down, and the negative side is that when the excess liquidity dries up, if the federal government continues to borrow at this rate, which is likely next year, then, it would become a very different story.

But for now, it doesn’t seem to be disturbing the local issuance market.

The outstanding FGN debt has grown astronomically in the past five years. Is there now the risk that we might be returning to the debt trap of the 90s?

It depends on what time horizon you look at. Short-term horizon, such as next two years, the answer is no, because you have to bear in mind that most of that debt is in local currency.

And when you have debts in local currency, the government has a few options, at the worst case scenario, you can either print money or increase taxes. And in the Nigerian government case, the third option is to devalue, so you have more naira from any dollar earnings, to offset the naira debt.

The naira debt is really not a problem. The problem is foreign currency components, which is growing very rapidly. And at some point, I think debt in foreign currency is almost $30 billion. When you add this new IMF, World Bank, AfDB, IDB $5.5 billion that has been recently approved, it definitely goes well over $30 billion. There are still all these Chinese borrowings that are not still clear what their status is. They were as high as $22 billion. I mean when you add this on top of everything, then you are getting into problem territory.

On the short term though, because of the structure of these loans, the Chinese loans, the multilateral or bilateral loans from DFIs, they are not a problem on the short term. They have low interest rates within longer repayment period. The problem is that at some point, you would start to have to repay these loans in foreign currency. And that could become a problem in about five to 10 years’ time, if it keeps growing at this rate.

For now, there is no near-term risk that Nigeria would have any difficulty to pay any foreign currency debt including Eurobond debt which is private. Total debt service for Eurobonds last year was $771 million. I think next year, it might be slightly more because of a maturity of $500 million early in the year.

But it is still not a problem, which is why Nigeria has not requested any type of restructuring of the Eurobond debt. Even when FGN Eurobonds dropped substantially in price (in March, it dropped 30 per cent plus) it pretty much recovered in price because the market knows that there is no risk of default on Nigerian Eurobonds.

Ten years from now at this rate, the foreign currency loans would become a problem.

When you look at the debt service to revenue, it’s about 99 per cent, which is too high. Who do you think would pay for these debts in the medium to long term?

I think there’s a lot of talk from the government side around debt service to GDP. We have less than 25 per cent which I guess local regulations allow. Debt service to GDP probably doesn’t mean anything because you don’t service debt with GDP. GDP is privately owned. This is not a communist state.

The GDP is actually privately-owned and not owned by the government. It does not have any ability to use the GDP to service debt. What you have ability to use to service debt is revenue that accrues to the government from taxes or other revenues with the government.

Yes, 99 per cent is very worrying, again, it might be worthwhile adjusting the 99 per cent downward for a bond repayment that happened sometimes in March.

When you have a bond repayment, you are pre-paying principal. That in theory, is servicing but it is not a cost for carrying debts. Cost of carrying debt is the interest. And in reality, there are very few governments in the world that ever paid down their debt.

When you look at the US government, their debt has more than doubled in the past 10 years. In fact, in the past three years it has increased probably by $6 or $7 trillion.

In the case of Nigeria, we have bonds that are as far as 2049 maturity, both in local and foreign currencies. And these are bullet repayments. Clearly, those would not need to be repaid any time before then. What would probably happen is that, the debt would most likely keep getting larger, but they would find a way to make the interest payment lower, and you just keep rolling it over.

I don’t see any scenario in the foreseeable future where Nigerian government debt will materially reduce. The only way that would happen is if there was some substantial selling of government’s assets to bring down debt.

And again, in the face of a huge infrastructural deficit, why are you bringing down debt? You should be using the money to build the country itself.

US equity markets are setting all-time highs, but the NSE ASI seems stuck at a fraction of its all-time high. Why has this market failed to surpass its 2008 highs?

The US markets, particularly the S&P and NASDAQ indices, recently set new all-time highs. The Dow Jones index is yet to do that but it is getting close. So, it is a bit odd that you are having all-time highs in the middle of a pandemic with a huge spike in US unemployment and earnings collapsing in a couple of companies.

But the reason why that is happening is primarily because the Federal Reserve Bank has pumped a lot of money into the system. And their system is a bit different from here.

When the Federal Reserve Bank pumps money into their system, some of that money finds its way into the stock market. In the system we are running here in Nigeria, none of that money goes into the stock market. The people who get hold of the money that is coming out of CBN, they are almost prohibited from putting the money into stock market. It is different in the US. So, a lot of money that their federal government has released, has entered their stock market and pushed it up.

US investors are given the option of earning almost zero on their money in US Treasuries. Buying stocks that actually still pay yields way above government yields is a rational choice. I mean, many US companies are paying dividend yields of 2 per cent and above, so it makes sense to park in money in stocks, which is what they are doing.

Now when you bring it to the Nigerian case, unfortunately, here, you have not even had any significant economic growth in the past few years, and the companies have not been growing earnings at a very rapid pace, and you need continuous earnings growth to have your stocks become more valuable. That is really not happening here.

Also, you have a situation where you don’t have a lot of the fast-growing sectors of the economy well represented in the stock exchange. It is only recently that MTN got listed and the stock is doing quite decently, but the growth areas of the economy are not represented in the stock exchange, so you might not get the kind of index growth that you hope to get.

If you look at the US, most of the companies that are propping up that market are big tech companies that are still growing.

There seem to be very few equity listings coming to the market. In fact, the number of listed companies on the NSE reduces every year. When will this trend be reversed?

I think that is an unfortunate trend. That is factual. You have to go to the history of the NSE and the 70s indigenisation. A lot of companies were forced to list, so those companies basically, some of them are delisting for different reasons and a number of them are just dying off. Some are now dormant and no more very attractive to investors.

So nobody really misses those ones.

The challenge is getting new companies to come to the exchange. The problem seems to be that, for most sectors, public companies in Nigeria have a lower valuation than private companies. That is the root problem.

So if you own a company, you don’t see any value in going to list it, and then, if you want to do a transaction for equity raising, everybody points to your stock price. You find out that your public price is far less than when you are a private company and you have a higher valuation.

That creates a big disincentive for anybody to list you. The whole point of listing is that you hoped to get a higher valuation as a public company. And also, the structure of the market is such that you don’t really have any significant pool of institutional equity investors outside the pension funds.

Mutual funds that are equity focused are very tiny, and you can’t really rely on HNI or corporate investors in the market local. Foreign investors are not that excited about this economy anymore, on the equity side, so you don’t really have demand for the instrument. And when you don’t have that kind of demand, there is a very little motivation for companies to rush to the market.

Until we do have a situation where your public valuation is higher than your private valuation, you might not see any rush in companies coming to list on the exchange.

Governments seem to have a long-term challenge funding their recurrent expenditure, suggesting they cannot fund infrastructure needs of the country. What is the way to bring in fresh funds for infrastructure development?

We have structural problems across the board both at state and federal governments level, because it’s the practical reality. It’s just mathematical, given their payroll, and pension cost, which can only go up every year. It cannot go down, without a huge restructuring of the workforce and layoffs. And that is politically not on the table.

Eventually, it is already happening at the federal government level, and that is why the debt service is so high. Eventually the government basically is just living on borrowed money and hoping that some generations in the future would repay the debts.

So first thing is that the government has to restructure, it can’t keep just getting bigger in terms of its operating cost. Because its revenues are not growing commensurately.

Also, philosophies around who owns what have to change. There was a time in this country where to just make a phone call it was through the government company. We had no private options. That has changed.

That kind of change has to apply to most sectors. The government shouldn’t really be in most sectors of the economy, it should be left to private investors to run and the government taxes them.

But where are those private investors? They are not in Nigeria. The money to build infrastructure does not physically exist in the country. Even if you take all the money in the country and put it into infrastructure, it would not be enough. So, you have to get fresh money from abroad that would come in to build infrastructure to stimulate economic growth and eventually these investors get their money back in foreign currency

So far, that has really not happened. There is no private company in any serious infrastructure in Nigeria outside some ports. The power privatization attracted some private money that was mainly leveraged, and that sector is not in good shape right now.

That privatization hasn’t solved anything as the government keeps spending on subsidizing the sector. So many sectors have to be opened to private capital especially foreign private equity. Not debt, but actually equity. Meaning, risk capital that might make a good return or might be lost. That is what equity is; it’s not debt.

That money has to come in from abroad. There are various structures that can be used but right now, we don’t seem to be making much progress in that front because, there is no evidence of any money having come in, in any material way into infrastructure, and that has to change.

Can you give an assessment of the investment climate amid the COVID-19 pandemic, and what are your predictions?

The investment climate locally cannot be good right now because we do know that there is an economic downturn driven by the COVID-19 situation. We haven’t seen the Q2 GDP data from NBS, but we are quite sure it is down. We haven’t also seen Q2 results of public companies, but we are quite sure it’s down.

So clearly, the investment climate is not great right now. However, fixed income investors have been making very good returns, because yields have been falling and bond prices have been going up. So fixed income investors have done very well.

Equity investors in US markets have done well, and the NSE hasn’t done great, but hasn’t collapsed either. It might be down a bit, but it isn’t down that much.

Again, bear in mind a couple of things. One is that, the oil price dropped because of COVID-19. If COVID-19 ends in one year, and oil prices are a lot higher, it does have a slightly different impact on the tone of the investment climate in Nigeria.

This economy is still hinged on the oil price. So a lot depends on where oil goes to, which is what will drive the exchange rate. Also, it depends on the political direction the country goes.

There is an election in 2023, this president is not due for re-election, so it depends on the direction that the winner of that election decides to go.

If the country decides to go on a more private capital trajectory, the investment climate would be very different from the current status quo, where it seems to be that government thinks it is the solution to a lot of things.

Because right now, that model has not generated the returns that we are looking for. The returns meaning, high GDP growth. Without high GDP growth, we can’t have a great investment climate locally. Right now, we don’t have high GDP growth, so a lot will depend on the political environment which is the foundation that would push forward the policies that would drive high GDP growth, and give us a good investment climate going forward.

What are your projections for UCML in the nearest future?

For us, we are going to keep building on what we have done in the past six years. Certainly on the investment banking side, we are going to be deepening our strength in debt capital market.

We are doing quite a number of things in the M&A segment, we want to build on that track record also. For asset management, we are looking at building one or two investment in products and technologies to help aggregate assets with a more cost-effective model, so that we can assess a bigger market.

And we would be coming out with a number of funds also to target certain segments of the economy that are underserved. For the securities team, we are looking at expanding our offerings in securities both for fixed income and equities, and we believe there are a number of opportunities in the market for smaller operators.

We do know that there are lots of operators in this market, but clearly, there are new companies that are coming up. And we are among the new companies that are looking to dominate the market in the future.

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