Nigeria’s budget deficit and borrowing strategies

Dr. Abraham Nwankwo, DMO boss

In June, the nation’s 2017 fiscal bill of N7.44 trillion (about $24.5 billion) was enacted into law. But in it, $7.5 billion (about N2.3 trillion is short of revenue target, popularly known as deficit. This shows about 31 per cent of the entire budget.

For the Director-General, Budget Office of the Federation, Ben Akabueze, the plans by the Federal Government to fill up the gap by borrowing $3.5 billion (about N1.1 trillion) in foreign loans and Eurobonds and $4 billion (about N1.2 trillion) from the local debt market has been communicated.

Tagged “Budget of Recovery and Growth,” it is expected to address the ongoing recession last officially acknowledged last year and stimulate growth, through huge investments in power, roads, mass housing, security, among others. These will also spill over to the real sector in an effort to jumpstart the economy.

The Minister of Budget and National Planning, Udoma Udoma, has also expressed confidence the budget will “stimulate and attract private sector capital and private sector spending.”

According to the minister, the plan is indicative of government’s determination to “bring succour to our people…by taking strong action to change,” explaining that the rationale for such a huge budget is the current economic reality, which the country cannot be “timid and cautious” in its approach but rather be “bold and focused” in its actions.

Experts have also agreed that the 2017 fiscal plan is certainly ambitious. It is about 21% higher than the budget provision of N6.06 trillion in 2016 and will require skilled management and fiscal discipline to make it succeed. Critical to its success, however, is the ability to adequately finance it, particularly the deficit, just as Akabueze has identified the two key sources of finance for the deficit.

The federal government had last year proposed a three-year medium term external borrowing plan, which has yet to receive legislative backing, although the Minister of Finance, Mrs. Kemi Adeosun, said the borrowings would be at concessional rates from China Exim Bank, the Japanese International Cooperation Agency, African Development Bank, World Bank and other such development agencies.

But the bulk of the funding, however, will be from local and foreign debt capital markets through the issuance of Eurobonds and local bonds.

Granted, bilateral and multilateral concessional loans may look good on paper, but often with harsh conditionalities that may in the long run become a burden to an economy and may explain the reluctance to legislative support until they fully get the parameters.

Experts also agree that the debt capital markets represent a very viable financing option for the budget, though they worry that with the economic, regulatory and fiscal uncertainties, government may have to pay premium rates, as high as 10% or higher, to access the debt markets.

Some of the attractiveness of the debt capital market include the relative ease and speed of packaging and launching due to the absence of conditionalities, the ability to mobilize domestic and international financial resources in an efficient, non-inflationary way for infrastructural development and its provision of a benchmark yield-curve for pricing other (non-government) debt securities, among others.

The Debt Management Office (DMO), the agency obligated to borrow on behalf of the government, has its task cut out. Of course, this is the biggest deficit financing at its table. However, it appears DMO fully understood the enormity of the task as it has taken certain important steps to demonstrate readiness.

In 2012, for instance, it appointed Stanbic IBTC Stockbrokers Limited as government’s official stockbroker. The appointment signified the readiness of the debt agency to energise the secondary market in FGN bond and to widen the net and bring in the critical mass of otherwise excluded retail investors.

It also appointed Stanbic IBTC Capital as financial advisor for its $4.5 billion Eurobond Programme (concluded in March 2017), as well as Standard Bank of South Africa and Stanbic IBTC Bank as International Joint Lead Manager and Financial Advisor (respectively) for its $300 million Diaspora Bond issue (concluded in June 2017).

Essentially, the appointment of Stanbic IBTC Stockbrokers, according to the DMO, was for it to “act as an intermediary between the DMO, NSE (Nigerian Stock Exchange), stockbrokers and other market participants to ensure that all activities in FGN Bonds, and other FGN securities that may be listed in the future, are effected smoothly.”

It was also to “provide prices for FGN Bonds on the floor of the Exchange so that investors, especially retail investors, who wish to buy or sell FGN Bonds can do so.

Indeed, the pedigree of Stanbic IBTC Group in investment banking, wealth and asset management most likely gave it the edge in the selection process for the funding initiatives of the DMO. Stanbic IBTC Stockbrokers is one of the leading brokerage firms in the country in value and volume terms and has won the NSE CEO Prize as the best stockbroker for three consecutive years to 2016. It recently helped Lafarge Africa Plc raise the largest bond issuance by a corporate in the country.

Meanwhile, Stanbic IBTC Bank is the only AAA rated bank in Nigeria by Fitch Ratings. Coupled with these is the strong heritage the Stanbic IBTC Group derives as a member of the 154-year Standard Bank Group, the largest financial institution in Africa.

Analysts believe the DMO should be able to draw on the strong local expertise of Stanbic IBTC as well as the Stanbic IBTC Group’s expansive international connections via Standard Bank to achieve success in government’s drive to raise an unprecedented $7.5 billion in deficit financing, a figure that could rise higher if revenue projections fall short.

Its role in the successful issuance of government’s $1 billion 15-year Eurobonds offering under the first ever Euro MTN Programme by the Federal Republic of Nigeria in March 2017, following immediately by a tap issuance of the same instrument in April 2017 for an amount of $500 million to buttress their argument. They equally point to similar successes achieved in the recently concluded $300 million Diaspora Bond issuance.

So far this year, the DMO has successfully issued the FGN savings local currency bonds auctioned monthly. The government has also successfully issued its fourth Eurobond in April this year (a tap issue of the 15-year Eurobond, also being the longest tenor so far launched in the international capital markets by the FGN).

The $1 billion Eurobond was, according to the DMO and NSE, “780% oversubscribed”, with orders in excess of $7.8 billion. The 15-year Eurobond, which matures in 2032, also witnessed the successful extension of the tenor of DMO’s borrowing programme. The last Eurobond was for 10 years.

Stanbic IBTC Capital, which acted as financial adviser to the DMO on the issue, played a key part in the international acceptance of the bond. And Chief Executive, Stanbic IBTC Holdings Plc, Yinka Sanni, has promised that the financial institution will “continue to spearhead efforts aimed at actualising Nigeria’s developmental aspirations.”

To further galvanize the local debt markets and ensure its debt raising targets are met, the DMO, sponsored by Stanbic IBTC Stockbrokers, listed the Eurobond on the NSE and the FMDQ OTC Securities Exchange for secondary trading, having earlier listed it on the London Stock Exchange.

The FGN Savings Bond was also introduced and the first tranche listed on NSE, targeted at the mass market end of the capital market. The DMO had revealed that it planned to issue the savings bond monthly.

The Series 1 of the savings bond, which was offered for subscription in early March at 13.01% coupon, 3-year tenor, attracted 2,575 retail investors who paid a total of N2.1 billion. Series 2, offered for subscription in April, saw an increase in coupon rate to 13.8% for the 3-year tenor while the 2-year tenor had a 12.8% coupon.

For Series 3 in May, coupon for 3-year tenor was 14.2% and 13.2% for 2-year tenor. The subscription rate for the savings bonds has remained strong, underlining its acceptance by retail investors.

Director-General of DMO, Dr. Abraham Nwankwo, said at the listing of Series 1 that “about 75 per cent of these deals (subscription) were from ordinary Nigerians.” And participation has remained bullish with subsequent issues.

Debt capital markets across Africa have shown an unusual resilience, political and or macroeconomic challenges notwithstanding. The growth in debt market issuance in spite of numerous challenges, according to the Head, Debt Capital Markets South Africa, Standard Bank, Zoya Sisulu, is indicative of “growing maturity and depth.” Nigeria’s debt market have been more robust and innovative than most and there is no reason to believe it cannot help support the financing needs of government for the successful implementation of the 2017 budget.

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