2019 Debt Report: FG’s Debt Profile Still Aloft

Data published by the Debt Management Office (DMO) earlier in the week revealed a 12.4%Y-o-Y rise in total public debt to ₦27.4tn (US$84.1bn) from ₦24.4trn (US$79.4bn) in FY:2018, following a 21.1% growth in FG’s borrowings to ₦23.3tn. The FG’s total domestic debt grew 11.7% Y-o-Y to ₦14.3tn as promissory notes surged 121.1%Y-o-Y to ₦732.6bn, driven by the Federal Executive Council (FEC)'s approval of ₦3.4tn new notes for the settlement of accumulated arrears. Similarly, total FGN Savings bonds and FGN bonds also rose 17.9% and 12.7%Y-o-Y to ₦12.7bn and ₦10.5tn respectively.

The FG’s external debt rose 9.9% to $27.7bn in FY:2019, driven by a 22.6% and 15.5% Y-o-Y uptick in multilateral and bilateral financing to $12.7bn and $3.8bn respectively while commercial loans remained flat at $11.2bn Y-o-Y.

FG’s Debt Strategy to Take a Backseat
The FG’s strategy to diversify its debt mix by increasing the share of foreign debt to 40.0% of total debt to reduce debt servicing cost seems to be gradually paying off. The FG’s total debt service in FY:2019 moderated 6.9% Y-o-Y to ₦2.2tn from ₦2.3tn in FY:2018. The moderation in debt service was largely due to subdued external debt service which fell 9.4% Y-o-Y to $1.3bn. This was driven by a 23.6% Y-o-Y moderation in external commercial debt service to $787.2m, despite increases in multilateral and bilateral debt servicing costs. Domestic debt service on the other hand, also softened by 6.2% Y-o-Y to ₦1.7tn.  Nonetheless, the FG’s debt mix is still below target with a split of 32.9% for external debt in FY:2019 from 31.8% as at FY:2018.

As external pressures intensify, it would be increasingly difficult to achieve the FG’s target. External debt issuance in the near term would be a walk on a tight rope given recent credit rating downgrade by major rating agencies. More recently, FG  long term credit rating by S&P was lowered to junk status, making it even more difficult to return to the Eurobond market in the near term despite a lower interest rate environment. The case for domestic debt issuance is more compelling as the average yield on FGN bond is currently at 11.6% relative to the yield on Eurobond at 12.2%.

Sustained Debt Sustainability Pressures
Debt sustainability concerns remain in the wake of an exchange rate devaluation, lower oil prices regime and the shutdown of economic activities. Total public debt to GDP moderated marginally to 19.0% in FY:2019 from 19.1% in the previous year while FG’s debt to GDP increased to 16.2% as at FY:2019 from 15.1% in FY:2018. These ratios remain below the recommended threshold of 55.0% by the IMF/World Bank. However, debt servicing to revenue ratio was elevated at 56.4% of estimated actual revenue in FY:2019 though lower than the 61.0% for FY:2018. Given the prospect for weaker revenue collection in 2020, we anticipate a significant increase in FG's budget deficit and debt servicing cost.