The Nigerian government should consider seeking external financing, according to Abraham Nwankwo, head of the country’s Debt Management Office (DMO). He also outlined ambitious plans for local market borrowing in 2008.
Nwankwo told delegates at the Renaissance Capital investor conference on sub-Saharan Africa that Nigeria will issue N600 billion ($5 billion, or 3.5% of GDP) in domestic debt next year.
But he added that this would still leave the sovereign “grossly under-borrowed,” given the country’s substantial financing needs for infrastructure investment and other capital expenditures. He said that the possibility of issuing a sovereign benchmark should not be ruled out, as it could lower borrowing costs for other domestic institutions.
In November 2006, Nigeria mandated Citigroup, JP Morgan and Merrill Lynch to lead the country’s debut bond, but Nwankwo explained this plan had been postponed indefinitely under political pressure.
“The politicians wanted a clear break with Nigeria’s debt history and thought the process was too costly,” Nwankwo said.
Speaking to Emerging Markets on the sidelines of the conference, Nwankwo explained “there is now greater demand for debt in the thriving local market and we will step up borrowing next year.”
Africa’s largest oil producer has raised N511 billion in the local market so far in 2007, with one N20 billion 10-year bond auction on 19 December remaining. Nwankwo noted that there is enough demand from local pension funds, banks and insurance companies to issue more long-term debt, and revealed that next year will see the local currency curve pushed out to 15 years for the first time. He added that one-third of next year’s issuance will comprise bonds with maturities of 10 years or longer.
But the sovereign still needs to tap international markets as soon as possible, Nwankwo said, so the DMO is examining offshore issues in naira, “to allow foreign investors to access local currency bonds”. He avoided calling this issue a naira Eurobond, instead calling this a GDR (global depositary receipt).
This would potentially avoid the political controversy that might emerge from a hard-currency Eurobond issue. Last month, the country’s finance minister Shamsuddeen Usman told Emerging Markets that the country would not issue a Eurobond due to the stigma created by the nation’s woeful debt history. “Whenever a government talks about issuing debt, Nigerians get scared,” Usman explained.
By contrast, Nwankwo said popular support for such borrowing initiatives would be guaranteed once the public were informed about the benefits, such as lower borrowing costs for the private sector and sub-national governments.
“I think all people of Nigeria support foreign investors and have greater trust in the [federal] government,” he argued.
And he added that the DMO should broaden its role by seeking to improve the culture of debt management at the state level, to ensure that ambitious regional financing plans are sustainable. Nwankwo explained that state governments need to boost the transparency of their public finances, and to acquire a greater understanding of market discipline and credit risks.
Lagos state, which generates about a third of the country’s economic output, plans to sell project bonds worth over a billion dollars next year to fund its infrastructure investment drive.