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A fresh report by FBNQuest, an investment banking and research arm of FBN Holdings Plc has revealed that due to the latest Eurobond issuance by the Federal Government of Nigeria (FGN), the annual cost of external debt service is set to rise by about $260 million.
The FGN in September issued $4 billion in Eurobonds (7-year $1.25 billion, 12-year $1.5 billion, and 30-year $1.25 billion yielding 6.125 per cent, 7.375 per cent, and 8.25 per cent respectively).
According to the Debt Management Office (DMO’s) latest quarterly data the FGN’s external debt service payments amounted to $299 million in second quarter (Q2) 2021, consisting of $157 million and $142 million to market and non-market creditors respectively.
The amount according to the report is four per cent higher on a year on year (y/y) basis. However, the research firm noted that, the external obligations are -70 per cent lower on a quarter-on quarter (q/q) basis, largely because the FGN’s payments to foreign creditors shot up sharply in Q1 ‘21, mostly due to the maturity of Nigeria’s 6.75 per cent $500 million Eurobond in January. It said an additional reason is that debt service payments tend to be elevated in Q1 and Q3 because the FGN’s external debt issuances are concentrated in those quarters.
FBNQuest Research analysts believe that Nigeria’s external financing burden appears to be manageable.
“Excluding principal repayments, interest and fee payments amounted to $567 million in the first half (H1) of 2021, implying an annualised average interest rate of 3.4 per cent, compared with 10.7 per cent for domestic loans.
“The low single-digit interest rate reflects the fact that the external debt is skewed in favour of concessional loans from multilateral and bilateral lenders,” the report read in part.
For instance, based on annual interest and fee payments in H1 2021, and the average stock of external debt as at end-December 2020 and end-Jun 2021, the firm calculates the average borrowing cost from the World Bank Group at 1.3 per cent.
According to the report, given the current difficulties with the naira exchange rate, an often-cited criticism against external borrowing is that the naira’s devaluation adds to the debt payment burden.
“While acknowledging the criticism, we also recognise that a well-structured external loan mix skewed toward non-market (concessional) debt may prove to be less onerous than domestic market debt. “However, such concessional debts often come with conditionalities such as the implementation of institutional reforms,” it stated.
