Against the backdrop of the huge debt service costs being incurred by the Federal Government, one of the nation’s Deposit Money Banks, Guaranty Trust Bank Plc, has highlighted the need for the government to reduce its borrowing cost.
The lender, in its ‘Macroeconomic and banking sector themes for 2018’ released on Tuesday, also expressed concerns that the upcoming 2019 elections might trigger repatriation of capital by foreign portfolio investors.
It said the true deregulation of the downstream oil and gas sector as well as the passage of the remaining sections of the Petroleum Industry Bill should be on the front burner of the government’s to-do list this year.
The bank noted that the Federal Government in February 2017 successfully issued $1bn 2032 notes and tapped an additional $500m a month later, adding that it raised another $300m through Diaspora Bond issuance in June 2017 and then issued $3bn dual-tranche notes comprising of 10 and 30-year Eurobonds of $1.5bn each.
The DMB said the offering of a N10.69bn Sovereign Green Bond for subscription by the Debt Management Office in December “effectively brought total funds raised to over $4.8bn in a single financial year.”
It stated that while the debt to Gross Domestic Product was low at 16.2 per cent (in June 2017) relative to Sub-Saharan African average of over 40 per cent, debt to revenue stood at over 62 per cent in the same period.
According to the report, the DMO revealed that the country spends 34 per cent of its revenue on debt servicing, while acknowledging concerns about the country’s rising debt profile and the need to bring this ratio to much lower levels.
GTBank added, “A portion of these funds has been earmarked for refinancing existing domestic debt (which accounts for around 80 per cent of total debt) to shift towards lower-priced FX external debt.
“We expect the government to work towards reducing its borrowing cost and also utilise these borrowings (net of debt servicing) to fund infrastructural investments to stimulate and reposition the economy.”
Citing the Q3 2017 report released by the National Bureau of Statistics, the report said capital inflows increased to $4.15bn, which represented a 127.5 per cent year-on-year and 131.3 per cent quarter-on-quarter increase from $1.82bn in the third quarter of 2016 and $1.79bn in the second quarter of 2017.
According to GTBank, the increase is due to improvement in forex policy vis-à-vis importers and exporters’ window and the attractive yields in fixed income securities and equities.
“We expect that the sustenance or otherwise of these capital inflows will be largely dependent on the stability of the prevailing FX and interest rate policies. In addition, the upcoming 2019 elections might drive exit concerns of foreign portfolio investors premised on political uncertainty and might trigger repatriation of capital,” the lender said.
It noted that external reserves had increased by 48 per cent year-on-year from $25.8bn in December 2016 to a 37-month high of $38.2bn in December 2017 on the back of increased foreign investments, successful $3bn Eurobond issuance as well as higher crude oil prices and production volumes.
“We expect that this commendable accretion will be sustained throughout 2018 with positive investor confidence and FX stability as key drivers,” the bank added