19 June 2018 ( Lagos ) : On the basis of FGN budgets, the burden of domestic debt service continues to mount. The 2017 budget projected a total of N 1.49trn, and the National Assembly’s bill for 2018, which awaits the presidential sign-off, has N 1.76trn. Actual and reconcilable figures are elusive although an OAGF series has domestic debt service payments of N744 bn 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 600 bps 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 domestic and external financing of the N 1.96trn deficit in the finance bill for 2018 en route to the presidency. We expect that the domestic component will be substantially less that the N 1.25trn in the 2017 budget, and have seen the figure of N 1.00trn in the local media.
The stock of the FGN’s domestic debt increased by N 1.16trn to N 8.72trn in 2017. The Analysts at FBNQuest Capital Limited are not party to the FGN’s interest rate assumptions. Their 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, analyst’s 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.
Source: Gregory Kronsten and Chinwe Egwim from FBNQuest Capital Limited
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