(Greenwich Merchant Bank): Recently, the Debt Management Office (DMO) published the Medium-Term Debt Management Strategy (MTDS), 2020-2023, unveiling the Federal Government’s borrowing plans and management strategy over the four-year period.
The policy document which replaces the Medium-Term Debt Management Strategy (2016-2019), outlined plans to sustain borrowings from both Domestic and Foreign sources with emphasis on long-term instruments in the local capital market, while concessional funding from both multilateral and bilateral sources will be the main source of external loans.
In terms of targets, the DMO aims to raise the country’s Debt-to-GDP ratio to a maximum of 40.0%, up from the previous threshold of 25.0% of total GDP. The agency aims to create more legroom for the government to fund its budget deficits and other obligations, whilst maintaining the 55.0% Debt-to-GDP threshold set by the World Bank and International Monetary Fund (IMF) for Nigeria and her peers. Also, the DMO introduced a target for the Sovereign Guarantees, which is expected to be no more than 5.0% of GDP.
Concerning the country’s portfolio composition, the DMO raised the limit on Domestic capital to a maximum of 70.0% of its loan portfolio, from its previous target of 60.0%. The DMO also set Foreign borrowings target at a minimum of 30.0% of the country’s debt stock.
To reduce refinancing risk, the DMO maintained a target minimum of 75.0% of Nigeria’s loan portfolio for long-term instruments, even as the average tenor of Debt was kept at a 10-year minimum. Similarly, Variable Rate Debt as a percentage of total debt was targeted at less than 5.0%.
Concerning fiscal sustainability, we note that the DMO was largely successful in raising the country’s Debt-to-GDP ratio from 10.4% on December 31, 2015, to 19.0% on December 31, 2019, given the 2016-2019 target of a maximum of 25.0%. As of September 2020, we estimate Nigeria’s Debt-to-GDP at 29.6% which is consistent with the DMO’s plans to create more room for borrowing. While the country’s Debt-to-GDP is within the limits advised by the IMF, the country’s debt service to revenue ratio which we estimate at 82.9% for FY:2020, has raised concerns.
The implication of expensive debt servicing is negative for capital expenditure spending as the country allocates more resources to offsetting liabilities than in purchasing assets.
On the other hand, the focus on concessional funding from multilateral and bilateral sources as the primary source of external loans is positive as they are cheaper alternatives to commercial loans and should therefore lessen the burden on public finance.
While the move to raise the maximum limit on local debt in the country’s portfolio might reduce pressure on the currency, the trade-off could come in the form of crowding out credit to the private sector and hindering fiscal consolidation.
Nonetheless, we note that the DMO was close to its 2016-2019 target of 60:40 Domestic and External Debt ratio as it was able to increase foreign debt stock to 33.0% of the country’s total debt as at the end of 2019, from 16.0% as at the end of 2015. As of September 2020, foreign debt made up 38.0% of total debt stock, slightly above the 2020-2023 target.
Although we forecast GDP growth to rebound in 2021, mostly reflecting base effects and a quicker recovery in the non-oil sector, the country’s credit profile would continue to be constrained by widespread fiscal pressures, persistently weak growth, FX challenges, elevated unemployment, and ever-present revenue shocks.