Improved Macroeconomic Fundamentals May Bolster Investors’ Appetite for Govt’s U.S.$6.2 Billion Eurobond Offer

With the oil and gas sectors contributing only 8.34 per cent to real gross domestic products (GDP) in the first half of the year (1H 2021), the country’s macroeconomic resilience achieved through a broad and diversified economy may positively impact on its fortunes to access funding at the international capital market.

Also, as against growing public criticism over the rising public debt, the country’s economic managers have insisted that Nigeria maintains one of the lowest debt to GDP ratios of its peers, pointing out that increasing debt service cost is being managed by revenue growth.

The government maintains that public debt remained well balanced composition with majority of external debt and congressional/semi-concessional in nature.

Economic activities rebounded in the fourth quarter of 2020 (Q4 2020) and Q1 2021 back to positive growth and posted Q2 5.01 per cent year-on-year growth.

The performance is expected to bolster investor confidence in the economy as the federal government prepares issuance of N2.343 trillion ($6.2 billion) Eurobonds in the International Capital Market (ICM) to partly finance its N5.2 trillion 2021 Budget deficit.

The federal government is capitalising on improved macroeconomic fundamentals,

as the accumulation of reserves within the year is expected to provide substantial buffers against external shocks.

International reserves stood at about $34 billion as at August, able to cover payments for about 8.75 months of import cover.

Furthermore, the country’s diversified and resilient economy occasioned by effective policy making is expected to spur investors’ appetite.

The government is also banking on its immediate policy response to the coronavirus outbreak, which was adjudged to be effective, with COVID-19 cases peaking in June 2020.

Nigeria continues to diversify and grow the non-oil-and-gas sectors of the economy through continued economic reform policies.

Recovery was largely aided by the pick up in non-oil activity in information and communications, mining and quarrying, accommodation and food services, transportation and storage, education and trade.

According to the Eurobond Investor presentation, the federal government’s efforts at achieving fiscal prudence is expected to also strengthen investors’ confidence in the offer.

Accordingly, total public debt is expected to be maintained under self-imposed debt sustainability threshold of 40 per cent of GDP while efforts are being refocused on enhancing non-oil revenue and reducing non-essential spending which are key priorities under the Economic Sustainability Plan.

The 2021 Budget, themed, “Budget of Economic Recovery and Resilience,” focuses on post-COVID-19 economic recovery, diversification and growth as its top priority, whilst ensuring internal generation of revenue continues apace, with an increase in investment in capital infrastructure.

Meanwhile, the Power Industry Act (PIA) recently signed into law by President Buhari in August 2021 is expected to help drive fundamental changes and further investments into the Nigerian oil and gas industry, a situation which is expected to enhance government’s revenue earnings as well as be in a position to service its mounting public debt stock.

In the area of debt management strategy for the country, the Debt Management Office (DMO) had developed the Medium Term Debt Management Strategy 2020 -2023 to reflect the impact of COVID-19 including the effects on the market.

Consequently, borrowing from external and domestic sources will be aligned with the funding structure in the MTEF and Appropriation Act, and the borrowing plan as approved from National Assembly from time to time.

The plan also seeks to among other things, moderate the cost of debt service, as measured by the ratio of interest payments-to-revenue, which it recognized will depend on a significant increase in government revenues.

The federal government also maintained that the impact on Nigeria’s debt structure has been contained from the 2020 COVID-19 & oil price shocks with progress made in achieving longer term debt objectives.

The government is also banking on financial sector reforms and improving external position to convince investors that they need not worry over their euro bond commitments.

It said banking sector loan growth had continues with stable asset quality adding that key reforms had been enacted in 2020 to further strengthen and enhance stability of banking and financial sector, adding that simultaneously Nigeria’s external buffers have rebounded in 2021.

Part of the major policy initiatives in the financial sector included the Banks and Other Financial Institutions Act, 2020 (BOFIA 2020) signed in 2020 to strengthen regulatory and supervisory framework for the financial industry.

This has also expanded the CBN regulatory oversight powers and strengthened the apex bank power to intervene in situations involving distressed banks, including ability to suspend payments, transfer viable assets to a private asset management vehicle, and employ any other intervention tool deemed fit.

Others are the recognition of the legal enforceability of netting agreements, establishment of the Banking Sector Resolution Fund to provide liquidity to CBN’s resolution measures and supplement the Asset Management Corporation of Nigeria (AMCON), as well as creation of a special tribunal for enforcement and recovery of loans.

According to available data, robust buffers prior to the COVID-19 crisis and additional measures introduced by the CBN will help maintain the resilience of Nigerian banks.

Also, system Non performing loan (NPL) ratios remained stable at 6.1 per cent from December 2019 to December 2020 and have reduced to 5.4 per cent in June 2021.

Regulatory forbearance has been granted to banks in granting loans to firms significantly impacted by COVID-19 as such firms may be granted a moratorium on loan repayments as well as restructuring of existing loans.

Also, the implementation of Basel III Guidelines is currently in progress and set to take effect from January 1, 2022.