FG Bonds: Rising debt services cost, declining productions

AS the Federal Government continues to crowd out corporate reorganizations from the money market with high interest on treasury bills, OMO, bonds and other financial instruments, debts servicing costs continues to soar, while productivity diminishes.

A report released on Friday, 22 December, 2017, which showed that 8 million jobs were lost in Nigeria in 12 months, gives a clear indication of how productivity is grounding in the country while at the same time debt and cost of debt servicing keep mounting.

On Thursday, 21 December, 2017, the Debt Management Office (DMO) listed on the official list of the Nigerian Stock Exchange (NSE) and the FMDQ OTC market, $300million Diaspora bond, $3billion Eurobond.

Cross- section of experts however expressed concern on how external borrowing would help to enhance productivity to boost revenue, when the real cause of the escalating foreign exchange rate in the country has not been addressed.

CEO of the NSE, Mr. Oscar Onyema lauded the effort of the FG through the DMO in deepening the domestic debt market as well as the debt capital market (DCM).

Onyema said that the 5 years, 10 years and 30 years Diaspora bond, Euro bond and Eurobond, among other debt instruments places the federal government as the highest issuers of debt instrument in the country.

“The federal government is the highest issuer on the fixed income space and it provides an avenue to diversify portfolio” Onyema said.

However, the DOM DG was confronted with varied questions on why the commission has sustained to boost local and domestic debts and deploying greater chunk of the nation’s income to real sector growth, stakeholders raised concerns over rising debt profile of the FG.

Stakeholders called on the government to as a way of ensuring the declining productivity in the country, address what led to increase in interests’ rates and sustenance of the equities segment of the market through less borrowing by the federal government.

While some argued that the FG through the sustained borrowing , may be heading to the pre- Obasanjo years , when the government had huge debt burden and later expended much in debt rescheduling, others maintained that the increasing debt portfolio through foreign borrowing have not really addressed cause of forex volatility in the country.

A stock broker, Mr. Tajudeen Olayinka, expressed concern over government policies, which is projected to stabilize the market, but ends up distorting the system. ‘Borrowing he said “is making forex available and addressing the forex challenge, but what really drove the interest rates up has not been addressed”

He said that creating Naira money and Dollar money through sustained borrowing, usually create business opportunity for foreign investors which further diminishes the potentials of indigenous companies,

Meanwhile, the DMO Director General Mrs. Patience Oniha, said that the latest FG bond listing on the NSE and FMDQ listing would provide the opportunity for trading on the instruments in the secondary bond market.

According to her, the Diaspora Bond was issued in June 2017, while the $3bn Eurobonds were issued in November 2017 at the International Capital Market (ICM). Both offers were issued with significant features with the $300m Diaspora Bond was unveiled with five- year tenor and 5.625 per cent coupon.

On the other hand, the Eurobonds issuances, she said came in two tranches of $1.5bn 10-year offer with 6.50 per cent coupon and another $1.5bn 30-year offer priced at 7.625 per cent coupon.

DMO Director General added that listing the $300m Diaspora Bond and $3bn Eurobonds on the NSE and FMDQ OTC would help increase the number and range of securities available in the domestic capital market.

She said that, the listed Federal Government instruments would further pave the way for more bonds that will also be listed. Such bonds she revealed are the Green Bond and the mining bond among others.

However, she acknowledged the escalating cost of debts revising ratio to revenue, but sad that government is reducing such with new borrowing pattern to borrow externally and reduce domestic borrowing.

“We want to make sure that money is made available for development and we also give value for the investment by investors.

She said that Nigeria’s growth potentials are strong, coming out from depression and recording significant growth in the second and third quarters of 2017, “even the international institutions have acknowledged our growth, which though may be slow,

but with very bright outlook” Oniha said that the value of Nigeria’s external reserve has increased to over $35billion, a demonstration of the strength of its economy.

The target of the DMO in the long run, she said is to bring down the ratio of domestic to external debt within the range of 60-40 per cent, adding that Nigeria’s domestic external debt ratio was as high as 77 to 22 per cent before.

The DMO boss said that reducing domestic borrowing by government will help to reduce dominance in the domestic debt market as well as reduce interest rate, hence government borrows at high rates.

Nigeria’s debt to GDP has remained low, now that the revenue has further been depressed, it becomes more worrisome to strengthen measures towards enhancing productivity “government is looking at how to increase revenue.

As revenue increases, the debt service to revenue ratio will also decrease” and this informed reformed in the tax systems reform and the voluntary corporate assets declaration policy, expected to free funds uncaptured by prevailing tax regime.

The DMO DG stressed that the government is looking at how to nation’s debt stock, so that the debt management cost will lower. A policy direction that prompted the 30 year Eurobond borrowing from external sources at 7.625 per cent, against treasury bills rates of 18 per cent.

Oniha assured that the federal government is mindful of the challenges of borrowing from external sources, which include foreign exchange risks, “we earn in Dollar and also hedge FX volatility, we are also working towards managing the demand and supply side of forex. We are conscious of the high debt to revenue ratio and fx volatility”

Bonny Amadi