The investment environment in Africa’s most populous nation is becoming increasingly distasteful for foreign investors as the nation’s debt portfolio becomes a disincentive for good return on investment especially in the stock market. The situation becomes scarier as Nigeria dropped one notch on a recent Moody’s rating due to rising debt and fear of default in debt service to its creditors. BAMIDELE FAMOOFO reports.
The latest report published by the National Bureau of Statistics on Nigeria’s public debt stock which includes external and domestic debt, showed that it moved from N35.46 trillion ($86.57 billion) in Q2 2021 to N42.84 trillion ($ 103.31 billion) in Q2 2022.
Of this, external debt stood at N13.71 trillion ($33.46 billion) in Q2 2021 and increased to N16.61 trillion ($40.06 billion) in Q2 2022.
Domestic debt, on the other hand, stood at N21.75 trillion ($53.10 billion) in Q2 2021 and increased to N26.23 trillion ($63.24 billion) in Q2 2022.
This shows that public debt (in national currency) grew by 20.81 percent in Q2 2022 from figures recorded in Q2 2021. However, the share of external debt increased from 38.66 percent in Q2 2021 to 38.78 percent in Q2 2022, while domestic debt decreased slightly from 61.34 percent in Q2 2021 to 61.22 percent in Q2 2022.
A deeper look into the nation’s debt showed that the nation’s debt burden increased by 370 percent in the last 10 years, representing 23.4 percent of Gross Domestic Product while external debt increased by 1,483 percent to $40 billion or N16.6 trillion in 10 years.
Impact of rising debt on Investment
Financial experts have raised the alarm that investment in the stock market is on the receiving end of the nation’s unbridled appetite for borrowing as a review of the performance of the Nigerian Stock Exchange in October showed that all sectors except oil and gas recorded a loss. Insurance and Banking were the worst hit with a loss of 19.22 percent and 6.69 percent respectively in October. Most stocks recorded underwhelming performance in October 2022 as aggressive sell off of liquid stocks for higher yielding securities persisted in the review period. Airtel, the most capitalised stock was the worst hit in the market.
Chief Executive Officer, Financial Derivatives Company Limited, Bismarck Rewane, at the Lagos Business School Executive Breakfast in November, hinted that increased deficit financing is making sovereign debts more attractive than equities stocks. He expressed worry over the nation’s rising debt which may soon become unserviceable for the government as Moody’s indicated in its latest rating of the nation’s debt.
His words: “When the cost of borrowing money rises, bond prices usually fall. High interest rates are favourable for bond holders but discouraging to bond issuers as equity investors will sell off stocks for higher bond yields.”
“Financial experts have raised the alarm that investment in the stock market is on the receiving end of the nation’s unbridled appetite for borrowing as a review of the performance of the Nigerian Stock Exchange in October showed that all sectors except oil and gas recorded a loss”
Moody’s rating
Moody’s Investors Service downgraded Nigeria’s local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2, placing them on review for further downgrade.
According to the global rating agency, the downgrade is driven by the significant deterioration in the country’s public finances and its external position, increasing pressure on the sovereign credit position despite the bullish crude oil market.
“Moody’s assessment is that these developments are partly the result of weak governance and likely to last. The steep fall in oil production in 2022 and the extension of the expensive oil subsidy have almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices,” its announcement said.
It argued that policy levers available to manage weakening revenue and rising borrowing costs in the face of monetary issues across the globe are limited.
Moody was worried that the capacity of the Central Bank of Nigeria to protect foreign exchange reserves from external outflows is limited by the current restrictive monetary stance.
“The initiation of the review for downgrade is prompted by the risk that the ongoing fiscal and external deterioration accelerates, weakening further the government’s capacity to service debt and thereby increasing further its risk of default. The review will focus on understanding the Nigerian authorities’ strategy to address both domestic and external pressure and assessing the associated default risk for the government’s private creditors,” Moody’s stated.
It added that the government “publicly stated possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody’s default definition.”
The organisation concurrently lowered Nigeria’s local currency and foreign currency country “ceilings to B1 and B3 respectively, from Ba3 and B2 respectively.
It highlighted the “unpredictability of government actions, political risk and the reliance on a single revenue source” as significant concerns.
According to the statement, the downgrade also reflects significant transfer and convertibility risks given the track record of imposition of capital controls in times of low oil prices.
“Nigeria’s fiscal and external position hasn’t benefited from higher oil prices in 2022, which have been 42 per cent higher on average than in 2021. This is due to the 32 per cent drop in oil production since the beginning of the year (recorded between January and September of 2022) and growing domestic consumption of petroleum products – a product of the country’s economic development further incentivized by the expensive oil subsidy.
“The constraints on oil production increasingly appear structural, caused by repeated theft and lack of investment in infrastructure. While the oil sector is a relatively modest contributor to GDP, it is a primary source of revenue and foreign exchange generation,” it stated.
Revenue in a dire strait
Figures revealed by Rewane’s FDC Limited showed that Nigeria is in a very difficult situation with its inability to generate enough revenue to meet its various financial obligations, especially debt service.
According to Rewane, revenue realisation stood at only 42 percent of projected half-year revenue while debt service amounted to 114 percent of revenue and 66 percent of recurrent expenditure was funded through borrowing.
He noted that funding the government deficit through printing of money (Ways & means advances) rose by 3,500 percent to N22trn in 10 years.
“Debt monetization causes inflation through its impact on high-powered money. N20bn of WMA to be securitized converted to a 40 year bond at 9 percent. This could change the yield curve as longer term yields become lower than short term yields,” he noted.
Meanwhile, while Nigeria increased its total debt stock by N7.38 trillion year-on-years, from N35.46 trillion in second quarters of 2021 to N42.84 trillion in second quarters of 2022, representing 20.8 percent increase, total revenue generated in second quarter of 2022 stood at N2.89 trillion.
Figures provided by NBS showed that the three tiers of government (Federal, States and Local) shared a total sum of N2.89 trillion in second quarters of 2022, rising from N2.21 trillion in second quarters of 2021, representing an increase of 30.8 percent.
“Moody was worried that the capacity of the Central Bank of Nigeria to protect foreign exchange reserves from external outflows is limited by the current restrictive monetary stance”
FAAC disbursements in Q2, 2022
Breakdown of disbursement of the FAAC revenue among the three tiers of government indicated that the Federal Government received a total revenue of N764.27 billion in Q2, 2022 compared with N714.08 billion in Q2, 2021, representing a year-on-year increase of 7.03 percent while revenue to States improved by 16.6 percent at N670.28 billion in Q2, 2022. Local Governments received 15.9 percent than they got in Q2, 2021 with N493.10 billion disbursed to them by FAAC in Q2, 2022.
The Federation Account Allocation Committee disbursed the sum of N1.15trillion to the three tiers of government in April 2022 from the total revenue generated in March 2022.
The amount disbursed comprised N933.30bn from the Statutory Account, and N219.50bn from Valued Added Tax (VAT). The Federal Government received a total of N277.10bn from the N1.15trillion, States and Local Governments received a total of N227.20bn and N167.91bn respectively. The sum of N81.93bn was shared among the oil-producing states from the 13% derivation fund.
The Revenue generating agencies comprising Nigeria Customs Service (NCS), Federal Inland Revenue Service (FIRS), and Department of Petroleum Resources (DPR) received N10.78bn, N22.47bn, and N11.06bn respectively as cost of revenue collections. Further breakdown of revenue allocation distribution to the Federal Government of Nigeria revealed that a total net amount of N149.70bn was disbursed to the FGN consolidated revenue account; N4.68bn was received as a share of derivation and ecology; N2.34bn as stabilization fund; N7.86bn for the development of natural resources; and N6.65bn to the Federal Capital Territory Abuja.
In May, it disbursed the sum of N833.86 billion to the three tiers of government in May 2022 from the total revenue generated in April 2022. The amount disbursed comprised N626.15bn from the Statutory Account, N20bn from Non-Oil Excess Account, N8.89bn from Excess Bank Charges Recovered for the Month and N178.83bn from Valued Added Tax (VAT). The Federal Government received a total of N257.61bn from the N833.86bn, States and Local Governments received a total of N201.26bn and N149.25bn respectively. The sum of N48.49bn was shared among the oil-producing states from the 13% derivation fund. The Revenue generating agencies comprising Nigeria Customs Service (NCS), Federal Inland Revenue Service (FIRS), and Department of Petroleum Resources (DPR) received N8.15bn, N11.33bn, and N10.13bn respectively as cost of revenue collections. Further breakdown of revenue allocation distribution to the Federal Government of Nigeria (FGN) revealed that a total net amount of N128.55bn was disbursed to the FGN consolidated revenue account; N4.42bn was received as a share of derivation and ecology; N2.21bn as stabilization fund; N7.42bn for the development of natural resources; and N6.01bn to the Federal Capital Territory (FCT) Abuja.
A further breakdown of disbursements in the second quarter in 2022 showed that FAAC disbursed the sum of N904.45bn to the three tiers of government in June 2022 from the total revenue generated in May 2022.
The amount disbursed comprised N589.95bn from the Statutory Account, N101.32bn from the Electronic Money Transfer Levy, and N213.18bn from Valued Added Tax (VAT).
The Federal Government received a total of N229.56bn from the N904.45bn, and States and Local Governments received a total of N241.82bn and N175.94bn respectively. The sum of N33.45bn was shared among the oil-producing states from the 13% derivation fund. The Revenue generating agencies comprising Nigeria Customs Service (NCS), Federal Inland Revenue Service (FIRS), and Department of Petroleum Resources (DPR) received N11.90bn, N17.74bn, and N7.35bn respectively as cost of revenue collections. Further breakdown of revenue allocation distribution to the Federal Government of Nigeria (FGN) revealed that a total net amount of N105.33bn was disbursed to the FGN consolidated revenue account; N3.52bn was received as a share of derivation and ecology; N1.76bn as stabilization fund; N5.91bn for the development of natural resources; and N6.40bn to the Federal Capital Terri-tory Abuja.
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