FY 2018 Debt Report: High Debt Servicing Cost Underpins Debt Sustainability Risks

Since the sharp contraction in government revenues due to the oil price crash of mid-2014, Nigeria’s rising debt profile has raised sustainability concerns. Although government’s revenues have recently been supported by increasing oil prices, stable oil production and improving tax collection, Nigeria’s revenue to GDP still lags pre-oil price crash levels. Based on annualised Q3:2018 revenue data, we estimate that gross revenues was N7.0tn in 2018. While this is the highest revenue collection on record, it is weak relative to GDP at 5.5% compared with 7.8% in 2013. We believe that the ratio for 2018 is understated due to unbudgeted subsidy payments.

Weak revenue collection has widened FG’s fiscal deficit, leading to an aggressive ramp up in debt. The recently published debt data for 2018 by the Debt Management Office (DMO) allows us to measure the progress of the Federal Government (FG) towards its recent debt targets. In FY:2018, public debt increased by 12.2% to N24.4tn, with debt to GDP remaining unchanged at 19.1% from the previous year. This compares well with the IMF/World Bank threshold of 56.0% for low income countries. The FG’s total debt increased by 12.4% to N19.2tn, driven by an expansion in external debt by 42.7% to N6.5tn while domestic debt increased at a moderate 1.5% to N12.8tn due to treasury bills paydown of N843.8bn.

The treasury bills stock is now 21.4% of total domestic debt, well within FG’s target of a maximum of 25.0%. Similarly, the share of external debt to total debt has reached 33.6%, within sights of FG’s 40.0% target. We note that long tenor debts are meant to reduce FG’s refinancing risk while external debt is aimed at reducing the crowding out of the private sector in the local debt market and debt servicing costs.  Ultimately, we note that high yields on government securities currently restricts private sector participation in the debt market. Meanwhile there is a high risk to government’s preference for external loans considering a likely devaluation of the currency over the medium-term in the face of lower oil prices.

Debt Servicing Costs Still Beyond Acceptable Levels
The FG’s total debt servicing costs jumped 39.0% to N2.2tn in 2018, above budget estimates of N2.0tn. Based on our annualised Q3:2018 revenues, the debt servicing cost translates to 60.0% of revenues which is marginally below 61.6% in the previous year. This is also below the erstwhile threshold of 28.0% established by the DMO. This shows that FG’s revenue worries are yet to abate as the performance of its aggressive tax collection drive has been underwhelming.

We reiterate that the FG must look to rein in its recurrent spending to bring fiscal deficit within acceptable thresholds. Although we note that with increasing public sector wages due to the recently passed minimum wage, this would prove difficult. Also, we do not expect a significant boost to revenue given the informal nature of the economy and fragile growth. Hence, we expect elevated debt servicing costs to revenue in the medium-term.