Changing Prospects for Domestic Debt Service

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On the basis of FGN budgets, the burden of domestic debt service continues to mount. The 2017 budget projected a total of N1.49trn, and the National Assembly’s bill for 2018, which awaits the presidential sign-off, has N1.76trn. Actual and reconcilable figures are elusive although an OAGF series has domestic debt service payments of N744bn in H1 2017, equivalent to 29.3% of FGN retained revenues. 

  • Domestic obligations account for about 90% of total debt service. They are more costly to service than external obligations because of the interest rate differential of about 600bps in the mid-curve and about 50bps less at the long end.
  • The differential, along with the threat of “crowding out”, lies behind the DMO’s policy of debt externalization. We await confirmation of the split between the domestic and external financing of the N1.96trn deficit in the finance bill for 2018 en route to the presidency. the We expect that the domestic component will be substantially less that the N1.25trn in the 2017 budget, and have seen the figure of N1.00trn in the local media.

Sources: Debt Management Office (DMO); FBNQuest Capital Research
  • The stock of the FGN’s domestic debt increased by N1.16trn to N8.72trn in 2017. We are not the party to the FGN’s interest rate assumptions. Our calculations arrive at an average cost of domestic borrowing of about 12.3% in 2017, based upon total annual payments and the mid-year stock of debt.
  • This is not to be confused with an average interest rate since about 30% of the stock consists of NTBs, which do not pay a coupon. That said, our impression is that the FGN has allowed itself a little “wiggle room” because it framed its proposals before the start of serious yield compression last year.

FBNQUEST RESEARCH

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