DOMESTIC DEBT TO HIT N4.5TRN IN DEC

By NBF News

Sanusi, CBN Governor
As activities are in top gear for the sale of the Federal Government's $500 million (N75 billion) Eurobond, experts have predicted that its success will shoot up the nation's domestic debt to N4.5 trillion.

According to Afrinvest West Africa Ltd. in its latest report on 'Nigeria in 2010: The Year Thus Far', outstanding domestic debt currently stands at N4.2 trillion as at the end of third quarter, from N3.8 trillion recorded in the second quarter of the year.

It adds: 'The Federal Government also plans to issue a N75 billion ($500 million) Eurobond to fund outstanding infrastructural projects. This is expected to be a five-year bond with a fixed coupon rate of 8.625 per cent that will also help finance the budget deficit in the country. This means that the country's domestic debt figure could climb to over N4.5trillion ($30 billion) by Q4 2010.'

It would be recalled that the Federal Government last week announced the appointment of Citigroup Inc. and Deutsche Bank AG as the bookrunners for the Eurobond sale, just as the Director of the Debt Management Office (DMO), Dr. Abraham Nwankwo reassured the nation that the offer would be a huge success.

Giving details of the domestic debts, the report states:

'FGN bonds accounted for 64 per cent of the Q2 2010 domestic debt amount, while Non-treasury Bills (NTBs) and Treasury Bills accounted for 23.9 per cent and 10.4 per cent respectively. Development Stocks and Promissory Notes made up the balance of the debt figure with both responsible for just less than 2 per cent of the domestic debt figure.

'The increase in domestic debt can mainly be attributed to the financing of Federal Government budget deficits and expenditure on capital projects. The DMO also released its issuance calendar for 2010 showing a quarterly increment FGN auctions from N300 billion in Q2 2010 to N330 billion in Q3 2010, with a scheduled issuance of N408.8billion in Q4 2010.'

On the recent Fitch Ratings which downgraded Nigeria's credit rating to a BB-, and from a stable to a negative outlook, the report warns that it may shoot up the cost of project execution by the governemnt:

'Apart from the cost incurred from Nigeria's bureaucratic structure, there is a risk that if a project funded through an FGN Bond is unsuccessfully completed either through mismanagement or poor execution by the contractor, the Federal Government would have to redeem its initial debt on the maturity and re-issue another debt instrument for the same project.

'This, coupled with the interest paid on any debt facility, means that a project could cost 2-3 times its original price. The Minister of Finance however noted that the steps needed to ensure that Nigeria's outlook be upgraded to stable are already being implemented. Standard & Poor's Rating Agency however affirmed Nigeria's B+/B global scale rating and the NGA+/NGA-1 national scale rating.

'They also confirmed a stable outlook, reflecting expectations that the country will maintain her strong external and fiscal balance sheet, and improve in budgetary performance,' the report stated.