Unpacking Nigeria’s new debt management strategy

Nigeria's Federal Executive Council recently approved the country's new medium-term debt management strategy covering the years from 2020 to 2023. The strategy includes a shift towards sourcing a larger proportion of new borrowings from domestic sources. CNBC Africa spoke with Egie Akpata, Director of UCML Capital, to discuss the implications of this new approach. Akpata expressed some reservations about the strategy, highlighting concerns about the timing and the impact on borrowing costs. He noted that the decision to increase domestic borrowing seems counterintuitive given the current high cost of borrowing in Nigeria compared to foreign currency markets. The cap on borrowing tenor at 25 years also raised eyebrows, as Nigeria already has 30-year foreign bonds in place. Akpata pointed out that the strategy signals a significant increase in borrowing, a move that could lead to a surge in debt levels without corresponding tangible development outcomes. One key theme that emerged from the discussion is the potential market reaction to the new debt management strategy. Akpata warned that the increased focus on domestic borrowing could crowd out private sector players and drive up interest rates. He expressed concern that the strategy might strain the local market, which had been experiencing relatively low borrowing costs. The lack of clarity on debt service to income ratios further added to the uncertainty surrounding the strategy's impact on the economy. Another key point of discussion was the recent corporate bond issuances in the Eurobond market, particularly the Echobank 300 million euro bond at 7.125 percent. Akpata noted the favorable conditions in the Eurobond market for Nigerian companies, citing the improved yields driven by the rally in oil prices. He highlighted the opportunity for the Nigerian government to capitalize on investor appetite for Nigerian paper through Eurobond issuances, leveraging the current market conditions. Looking ahead, Akpata addressed the challenges faced by corporate debt issuers in timing their bond issuances effectively. He emphasized the importance of seizing opportunities in a low-rate environment to avoid being caught off guard by sudden rate hikes. With interest rates on the rise, Akpata cautioned issuers to act swiftly to secure favorable terms for their debt offerings. He recognized the shifting landscape in the debt market, with rates climbing rapidly in recent months, signaling a more challenging environment for corporate borrowers. In conclusion, Nigeria's new debt management strategy has sparked debate and raised concerns about the country's borrowing practices. The focus on increasing domestic borrowing and the lack of clarity on debt sustainability metrics have left market participants apprehensive about the potential consequences. As Nigeria navigates its debt landscape in the coming years, policymakers and investors will closely monitor the impact of the new strategy on the economy and the borrowing environment.