In the just concluded week, the Debt
Management Office (DMO) in one of its press releases indicated its plan to switch the new external borrowing worth N850 billion to domestic borrowing.
In the 2020 Appropriation Act, earlier approved by the legislators, a total of N1.59 trillion was scheduled to be raised by the fiscal authority to partly finance the deficit in the budget.
Of the N1.59 trillion, N850 billion was to be raised from external source, while N744 billion was to be raised from the domestic market.
However, given the negative impact of COVID-19 pandemic on the world economy and the International Capital Market, the federal authority opted to raise the intended N850 billion external borrowings from the domestic market.
According to the fiscal authority, the conversion of the external borrowing to local borrowing became necessary in order to ensure the implementation of the 2020 budget as it has become more convinient to raise funds domestically given the COVID-19 pandemic and its attendant effect on the Nigeria’s crude oil dependent revenue.
With this change, the total scheduled domestic borrowings under the 2020 Appropriation increased to N1.59 trillion with zero external borrowing.
According to the DMO, the Senate has approved the request, by President Muhammadu Buhari to effect the conversion, on Tuesday, April 28, 2020 but awaits approval of the House of Representative before issuing the debt securities.
In another development, the Central Bank of Nigeria (CBN) in its press release stated that it has resumed provision of over USD100 million per week to all commercial banks for onwards sales to Small Medium Enterprises (SMEs), to make essential imports needed to revamp economic activities across the country, and to parents wishing to pay school fees.
According to CBN, the resumption of foreign exchange sales was amid the gradual easing of the COVID-19 lockdown in Nigeria.
Also, the Apex bank notified the public that arrangements has been made to resume foreign exchange sales to the Bureau de Change (BDC) segment of the market for business travels, personal travels, and other designated retail uses as soon as international flight resumes.
CBN reiterated its capacity to continue to defend the Naira as it promised to adequately meet the needs of all legitimate users.
The lender of last resort made this announcement at a time when the country’s capacity to earn foreign currency appears to be very weak.
At the international market, crude oil prices have crashed, especially the price of bonny light (Nigeria’s sweet crude) which remained low at USD16.51 per barrel. Crude oil traders are unwilling to take up Nigerian crude despite the discounts offered.
The country has also seen its external reserves plunge by 15.43% to USD33.44 billion as at Tuesday, April 28, 2020, up from USD38.60 billion as at December 31, 2019 while external borrowing climbed to USD27.68 billion as at December, 2019.
With the current realities of dwindling external reserves, low crude oil prices and the weak demand for crude oil, we feel the fiscal authority took the right decision to source its borrowing entirely from the domestic market.
Also, we expect FG’s move to lower its implicit interest rate and soften its debt servicing going forward, given the lower interest rate environment amid excess financial liquidity in the domestic market.
In fact, FGN bonds worth N156.06 billion auctioned by DMO in the month of April 2020, viz: 5-year, 12.75% FGN APR 2023 worth N30.07 billion, 15-year, 12.50% FGN MAR 2035 paper worth N72.25 billon and 30-year, 12.98% FGN MAR 2050 debt worth N53.74 billion were sold at lower stop rates for all maturities, especially stop rate for 5-year which moderated to 9.00% (from 10.00%).
Notwithstanding, we expect a considerable rise in local bonds rates in the medium-term given the huge amount (N850 billion) that will be issued.