Six months before Eurobond repayment, government debt servicing expenses as a proportion of income remain high, according to S&P Ratings, which confirmed the sovereign ratings while downgrading Nigeria’s outlook to negative from stable.
Nigeria’s national debt will surpass N44 trillion in the third quarter of 2022, as the government continues to struggle to fulfill income projections. Interest payments grew as borrowings increased. According to the ratings, interest payments on CBN bills and Ways and Means in have been factored into the overall interest charges. The total state debt is anticipated to exceed N77 trillion if the government admitted to including overdrafts from the central bank.
Nigeria’s finance minister suggested securitizing ways and means debt for 40 years, with a three-year moratorium on principle payments and a 9% interest rate. In addition, President Muhammadu Buhari recently presented the request for approval to the National Assembly.
The government budget for 2023 projects a fiscal deficit of N11.34 trillion, or 5% of GDP, to be covered by extra borrowings. Debt servicing expenditure is budgeted at NN6.3 trillion, or 57% of expected federal revenue of N11.9 trillion.
“The budget is based on the assumption that petrol subsidies will be removed by mid-2023. At the general government level, it forecasted a fiscal deficit of 5.9% of GDP in 2023 before averaging about 5.4% over 2024-2026, on the assumption a new government will pursue a degree of fiscal consolidation”.
The Nigerian government intends to restructure entire debt acquired under Ways and Means amounts to around N23 trillion, or 12% of GDP (GDP). The Debt Management Office intends to fund the majority of the budget through domestic issuances in 2023; of the N10.6 trillion expected to be raised, N7.0 trillion will be generated domestically, with just N3.5 trillion borrowed internationally.
Foreign borrowing will total N1.8 trillion in multilateral borrowing (much of which has already been awarded) and N1.76 trillion ($4.1 billion) in commercial external borrowing—either Eurobonds or syndicated loans—a decrease from N2.6 billion in the 2022 budget.
“The government will likely only issue Eurobonds if market conditions improve, due to high yields in the international markets, and could resort to syndicated loans in lieu”.
The government currently pays an interest rate of almost 20.5% on ways and means priced at monetary policy rate (MPR) plus 3%, according to the rating note.
“We expect interest payments to consume more than a quarter of general government revenue over 2023-2026, indicating a strained debt trajectory”, S&P stated.
The most populous African country did not profit from the oil bonanza due to insufficient infrastructure spending after years of neglect.
For 2023-2024, it forecasts only tiny current account surpluses of 0.2% of GDP. According to the ratings, crude oil and gas exports account for about 90% of Nigeria’s export receipts.
According to it, relatively high oil prices and robust remittances would enhance current account revenues (CARs) in 2023 and 2024, while the new Dangote refinery will assist cut the country’s import bill after 2023.
Despite the continuous rise in CARs, higher import costs, and the clearing of FX arrears, the CBN maintained that its intervention in the Investors and Exporters window will restrict the proportional growth in FX reserves.
“External liquidity remains sufficient for upcoming external redemptions, including the Eurobond maturity of $500 million due in July 2023. Over the past several years, Eurobond interest and redemptions have been paid on time and in full”.
Nigeria plans to remove petroleum subsidies by mid-2023 will weigh on inflation for 2023. According to S&P, the negative outlook reflects increasing risks to Nigeria’s debt servicing capacity over the next one-to-two years due to intensifying fiscal and external pressures.
It said the outlook revision reflects a view that Nigeria’s debt servicing capacity has weakened due to high fiscal deficits and increased external pressures. These stresses stem from low (albeit recently rising) oil production volumes, large refined-petroleum subsidy costs, high debt service expenditure, and a relatively large planned fiscal deficit in the 2023 budget.
The economy is estimated to have expanded by about 2.8% in 2022. However, S&P forecasts real GDP to average 3.1% in 2023-2026.
It noted that below-capacity oil production will likely continue to affect export growth, while inflationary pressure, fiscal constraints, and sluggish investment will weigh on consumption and investment growth.
However, these factors are likely to be partially counterbalanced by a new, potentially more business-friendly administration after the elections. In 2022, oil production (including condensates) averaged about 1.37 million barrels per day (mbpd), below the budgeted 1.60 mbpd, and below Nigeria’s OPEC production quota of 1.8 mbpd.
Low volumes more than offset relatively high average oil prices (at $98, compared with a budgeted $73) in 2022, keeping the general government fiscal deficit at 6.2% of GDP. It noted that significant underperformance of oil revenue in 2022 and higher debt service expenditure support its view that the government’s financial commitments appear strained unless there is credible fiscal consolidation after the elections.
Rising prices of imported goods, payments to clear foreign exchange (FX) backlogs, the Central Bank of Nigeria’s (CBN’s) intervention in the FX market to stabilize the naira, and low oil volume exports reduced gross foreign exchange reserves by about $3 billion in 2022, reaching $38 billion by year-end.
Despite increasing external and fiscal pressures, the firm thinks the government has sufficient debt-servicing capacity to pay the Eurobond maturity of $500 million due in July 2023.
“We forecast that the Nigerian economy will grow 3.3% in 2023, supported by non-oil growth, followed by average 3% annual growth over 2024-2026. We expect the oil sector’s prospects to improve over 2023-2026 as crude oil production levels increase, while significant refining capacity is launched”, it stated.
