Why Nigeria may pay more on future Eurobond offers – Akpata

Mr Egie Akpata is Chairman, Skymark Partners Limited, a Lagos-based firm. He has worked at BMO Financial Group in Toronto; Deutsche Bank AG in New York; United Capital PLC, and UCML Capital, where he is a director. Akpata has closed transactions in Debt and Equity Capital Markets, and Mergers & Acquisitions worth over N2 trillion in the past 12 years. He is an active player in the local capital markets and a regular contributor to CNBC Africa. In this interview, he explains the key drivers of current developments in the domestic and global debt markets, including why future Eurobond offers may cost Nigeria more.

What is your outlook on the government fiscal deficit and debt service burden, especially with the indefinite postponement of fuel subsidy removal? What will be the implication of Nigeria running a 3% – 4% fiscal deficit for the next five years? 

The absolute size of the fiscal deficit and debt service burden is expected to keep growing in nominal Naira terms. The extension of the fuel subsidy regime simply increases the size of these deficits. What those numbers will be as a percentage of GDP depends on how well government policies can stimulate economic growth.

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Whilst we all know Sovereign notes are risk-free instruments and many analysts would argue that the Nigerian government cannot default on a Naira obligation, and the worst would be to print more Naira. What are the odds if the government finds itself in such a situation, especially with an already elevated inflation rate?

I do not see a situation where the FGN would restructure or default any of its Naira debt instruments. The implication of such an action far outweighs the costs of other measures available to the FGN to avoid such an action. For instance, they can simply issue new debt to service existing obligations.

The same is largely true for FGN Eurobonds. The current interest cost and maturity schedules of those bonds are well within current and future FGN means to repay. Even though the FGN cannot print USD to service those bonds, the market view of FGN credit is still very positive.

With the sunset of the 10-year tax holiday on corporate bonds and the disposition of the government to revert fully to the tax provision, how do you see the growth in corporate debt issuance? Can it be sustained or do we just see this as something that would force issuers to depend once again solely on short-term bank loans?

All indications are that the pipeline of corporate bond transactions is very strong. It is likely that many issuers are more concerned about accessing the bond market before an election-induced slowdown of market activity, than about the tax implications of the expiration of the tax waiver.

Short-term bank loans are not a substitute for fixed-rate, long-term bonds. Most issuers are not ready to take on the refinancing risk associated with short-term loans. There is no guarantee that the facility will be rolled over or that the interest rate on rollover will be affordable.

However, if corporate bonds become taxable, issuers will need to pay a lot more to make their instrument competitive when compared with tax-free FGN bonds.

Won’t this policy halt the progress being made and undermine the depth of the Nigerian debt capital market, which even remains largely dominated by Federal Government Bond issuance?

FGN bond dominance of the market is partly due to the sheer size of the FGN, its increased borrowing needs in recent years and consistent issuance of paper all year round. That dominance has been with the market throughout the 10-year corporate bond tax waiver.

I believe that having benefited from the bond market, issuers will look beyond the added costs due to taxes and continue to access the market even if it costs more. The benefits of obtaining long-term, fixed-rate funding are too great to be ignored.

With the indicative hike in policy rates in the US, UK, Canada and other developed markets, global interest rates have spiked and yields on Eurobonds have risen accordingly. Won’t this trend jeopardise proposed foreign currency borrowings of the Nigerian government?

Volatility in the Eurobond market is a recent event – and rates have come down substantially in the past two weeks. However, rates today are much higher than in September 2021 when the FGN issued $4b of Eurobonds. As market jitters recede, it is very likely that the FGN will be able to access that market for a significant portion of its N2.57tr foreign borrowing component that is outside DFI funding. However, pricing on an FGN Eurobond today will be 1-2% above what was paid in September 2021, when rates were below historical trend.

The FGN remains a very strong credit in the Africa Eurobond space and its foreign debt service is relatively small compared to African peers.

The Nigerian government has notable amortisation repayment in its books between this year and 2023, and incidentally may be shy of the market due to the rate environment. Won’t this put pressure on the external reserve and force the CBN to devalue the Naira further?

I am not clear on the amortization in question. As far as I am aware, there is $300m Eurobond maturity later in the year. That is unlikely to cause a material drop in foreign reserves which are currently around $40 billion.

The MPC continues to demonstrate its pro-growth sentiment by keeping policy variables unchanged despite concerns on rising interest rates in the global market and renewed concern on brewing inflationary pressures. For how long do you think the MPC can sustain this stance?

Negative real interest rates are not unique to Nigeria. Most developed markets have very negative real rates as of today. Inflation in the USA is 7% but the 10-year US Treasury is at 1.9%. That, on a relative basis, is a lot more negative than in Nigeria where inflation is at 15.5% and the 10-year bond is at 12%.

MPC policy variables are relatively high at this stage in the economic cycle. Besides, the CBN has other ways of controlling money supply beyond MPR and other MPC variables. The data will suggest that the pro-growth sentiment of the CBN has been effective in getting the Nigerian economy out of the COVID-induced recession.

Some pundits are sceptical about bilateral loans from China and some argue that should Nigeria default on obligations to the “Asian mafias”, the country may lose control of some national strategic assets among other views, do you share this sentiment as well?

I am not aware of any national strategic assets which have been pledged to China as part of a loan agreement. If such cases exist, it is not clear how the Chinese lender will be able to enforce such rights within Nigeria. No lender disburses funds expecting a default, so it is safe to assume that the Chinese did their homework on the ability of the FGN to repay such loans before granting them. 

It can be argued that project loans are a positive development as it is easy to see exactly what the borrowing was used for. Compared to FGN Naira bonds or Eurobonds where the proceeds are primarily used to support the budget which is predominantly recurrent expenditure.