Daily Insight: Sovereign Debt – Externalization Target, How Close?

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Last week, the Debt Management Office (DMO) published Nigeria’s debt profile for Q1-18. Nigeria’s total debt stood at N22.7tn, a 4.5% increase from the debt stock as at end of 2017, N21.7tn. Taking a closer look at the debt composition, the ratio of domestic to external debt composition improved to 70%/30% in Q1-18, compared to 73%/27% in 2017 and 80%/20% in 2016. This is in pursuant to the DMO’s strategy to not only increase “low-cost” foreign borrowing but also substitute “high cost” domestic debt. This triggered the Eurobond earlier issued to redeem local treasury bills (NTBs); and specifically, in Q1-18, a total N279.7bn NTBs were redeemed as the proceeds from the Feb-18 $2.5bn Eurobond came handy.

Beyond minimizing costs, the DMO’s strategy also intended to curb government’s borrowing from crowding out lending to the private sector. While lower issuance by the DMO as supported the sharp moderation in yields and has stimulated increased corporate issuances, credit to the private sector remained weak; -0.5%q/q in Q4-17 and – 0.9%q/q in Q1-18, as lending rate stays elevated.

Nevertheless, the disparity between the DMO’s 60%/40% target and the current standing implies that more external borrowings may be underway. Accordingly, we implore cautionas rate hikes the Fed and policy normalization by the ECB and BOE points to higher external debt servicing amid potential FX risk.

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