•Tinubu and Shettima
Many African governments are currently caught in the crisis of refining domestic debts at cut-throat costs even as they overstretch the funding capacity of their central banks to bridge the gaping hole in their finances, a situation that has left many in dire straits, a report by S&P warned yesterday.
The crisis is fuelled by the global monetary tightening that has made the global debt market inaccessible or unaffordable to many developing countries, reports The Guardian.
The Federal Reserve has raised the interest rates to a multi-decade high of 5.25-5.5 per cent with some market analysts pricing more hikes before the end of the tightening cycles.
The S&P report coincided with the second to the last meeting of the rate-fixing arm of the Federal Reserve, which ended yesterday with the prevailing interest rate left unchanged.
The report, which analysed briefly the domestic quagmire of leading African economies, including Nigeria, Egypt, Ghana among others, comes as the African biggest country’s newly-inaugurated administration struggles to keep their governance going amid daunting fiscal challenges.
Earlier, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, told concerned Nigerians that the administration would not indulge in debt accumulation to fund its activities.
But less than three months after the assurance, they may have gone cap-in-hand in search of more loans even as foreign financiers are increasingly wary about the country’s ability to meet its obligations.
Ahead of the presentation of the 2024 budget, the Federal Government may be sourcing at least N8.7 trillion to partly fund the estimated N9 trillion deficit. It hopes to raise N206 billion from privatisation proceeds – an endless, wild goose chase that yielded no substance during the administration of Muhammadu Buhari.
The Medium-term Expenditure Framework (MTEF) covering 2024 to 2026 submitted to the National Assembly for deliberation puts the total Federal Government’s deficit for the period at N30.7 trillion. With less than N700 billion expected from privatisation of some public assets, the government looks forward to raising the bulk of the finances from both domestic and foreign debt markets.
As expected, the domestic market would account for 71 per cent or 21.4 per cent of the debt funding. The plan, which has been a trend across fiscal stranded African countries, from Ghana to Egypt, has been described by S&P as a major crisis that should bother many African leaders.
Earlier, the federal government restructured about N23 trillion sourced from the ways and means (W&M) window of the Central Bank of Nigeria (CBN) at a discounted nine per cent bond issued to the apex bank.
Whereas many leading economists and financial experts, including Dr Aye Teriba, bucked at the sincerity of the process, the Director General of the Debt Management Office (DMO), Patience Oniha, in an email exchange with The Guardian, said the debt restructuring was indeed completed with the DMO taking the debt off the CBN through bond issuance.
Yesterday’s S&P report hinted that, like the CBN, many domestic financiers are taking haircuts with much of the assets attracting negative real interest rates.
“That means the cost of refinancing domestic debt across the continent has soared in tandem with central bank policy rates. Wealth levels are featured prominently in the report due to domestic financing and variation across financial systems. The financing implications of this are that governments that found themselves locked out of foreign markets by early 2022, quite quickly started to come up against domestic financing constraints,” the report said.
Though Nigeria is not among hard-hit countries – Egypt, Zambia, Mozambique and Ghana – in terms of domestic debt refinancing crisis, according to S&P Global Ratings’ Domestic Debt Index (DDI), the country certainly faces a tough debt challenge with its debt-to-revenue ratio well above 100 per cent.
The fiscal deficit captured in this year’s budget performance is already estimated at N11.6 trillion or over 50 per cent of the total budget (including supplementary) at N22.65 trillion, according to documents obtained from the government.
The new management of the CBN, an institution that had indulged the Federal Government’s fiscal excesses with unrestricted overdraft, has pledged to comply with the letters of its enabling act in the management of its affairs, including its role as lender of last resort. If it does, the government could meet a brick in the coming years as it plans to continue the years of fiscal recklessness many accused the previous administration of.
Teriba had raised a concern that the domestic debt market, which has a capacity of about N30 trillion, has been exhausted.
The international monetary scene is still fraught with challenges. For instance, the Fed left the door open for further interest hikes yesterday on account of strong growth and still higher than expected inflation rate. A further tightening means the market would continue to de-risk, with attendant implications for the emerging and frontier markets.
Interestingly, Nigeria has faced its rare awkward peculiarities in attracting financing. David Adonri of Highcap Securities Limited recently described the reported CBN’s delays in fulfilling forward contracts as disastrous and a recipe for financial blockage.
Prof. Uche Uwaleke of Nasarawa State University also warned that the implications are grave if not checked on time. He explained that failure to fulfill forward contracts was akin to sovereign debt default.
The country has also faced a series of downgrading, which experts said have negative impacts on the country’s ability to source funds from the financial market.
At the onset of the current liquidity tightening last year, this paper reported that the country could be excluded from the global financial system, which would force it to rely on the local debt market. Since then, reliance on CBN overdrafts and other local windows has increased, starving the private sector of needed capital to expand and create jobs.
The situation, S&P report said, has fuelled bad domestic financiers”.
“Real rates on domestic debt remain deeply negative in Egypt, Ethiopia and Nigeria. Egypt experienced a pronounced dip in foreign investor interest since the onset of the COVID pandemic.
“Egyptian banks have the greatest exposure to their sovereign relative to their total assets – at 40 per cent versus the median 17 per cent among African sovereigns rated. S&P rates Egypt’s debt structure as generally weak. Egypt is acutely sensitive to the global monetary tightening cycle,” the report noted.
In June, Zambia struck an agreement with bilateral creditors for debt relief under the G-20 Common Framework, first requested by the government in February 2021. One of the greatest risks to Zambia’s domestic debt-carrying capacity lies in its very weak fiscal flow and stock measures this year, the report assessed.
“About one-half of Zambia’s is domestic, up from 30 per cent in 2018,” it added.
It stated also that Mozambique’s government made late payments on domestic commercial debt between February and May, constituting a selective default on its local currency rating.
Currently, Mozambique’s domestic roll-over ratio remains one of the highest in Africa at 18 per cent of GDP.
