Nigeria DebtVulnerabilityinlightoftheeconomicandfinancialcrisis

7/29/2019 Nigeria DebtVulnerabilityinlightoftheeconomicandfinancialcrisis

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DEBT MANAGEMENT OFFICE

NIGERIA

Impact of the financial and economic

crisis on debt vulnerability: Nigeriascase

Presentation at the Commonwealth Ministerial Debt Sustainability Forum

April 22, 2009By

Patience Oniha

Director, Market Development Department

Debt Management Office, Nigeria


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Genesis

Financial Crisis : Toxic assets resulting in lossesand weak balance sheets

Economic Crisis : Fallout of the financial crisis

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Nigerias Debt Profile

Significant reduction in total debts, post Paris andLondon Clubs exits in 2005 and 2006 respectively. Total

Debts at 31 Dec 2008 was USD 21.3bn, a 117% dropfrom USD46.3bn in Dec 2004

External Debt component, much smaller than

previously was. Now 17.4% compared to 77.7% in 2004.

Of the total external debt stock of USD3.72bn as at 31Dec 2008, USD2.86bn or 77% was concessional

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Sustainability

Sharp reduction in total debts and increasedearnings from oil as well as steady GDP growthhave collectively, made Nigerias total publicdebt sustainable

Debt Sustainability Ratios for 2008 are

provided in the following Tables:

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Debt Statistics2008 Actual % Threshold %

Total Debt/GDP 12 45

Ext Debt/GDP 2 20Dom Debt/GDP 10 25

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Debt StatisticsSolvency/LiquidityIndicators

2008 Actual % Threshold %

NPV of Debt/GDP 9.5 30

NPV of Debt/Revenue 33.1 200

Debt Service/Revenue 11.1 25

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Vulnerability Nigeria is not immune from the global financial and economic

crises.

Nigerias vulnerability is largely due to its dependence on theproduction and exports of crude oil. Economic growth/boom in theadvanced countries have a strong positive impact on the price ofcrude oil. External Reserves already dropped from a peak ofUSD62bn to about USD42bn due to the drop in crude oil prices.

The exchange rate has also suffered a devaluation from

USD1/NGN118 at end Nov 2008, to USD/NGN145.25 as at 17 April.

The domestic equities market have also suffered from price lossesdue in part, to the exit of foreign investors.

The proposed USD500m bond issuance by Nigeria in the ICM, was

deferred largely because of the global financial crisis.

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Vulnerability

Can also be viewed from the private sectors ability toaccess credit in the international capital markets.

Nigerias private sector was just beginning to receiveuncollaterised credits following the improved debtprofile and sovereign rating. These were in the form ofclean trade lines and short term loans from the global

banks and through Eurobonds( Guaranty Trust Bank-USD350m and First Bank of Nig- USD175m).

While the domestic institutions have grown bigger andstronger, the financial meltdown has constrained their

ability to access more capital.

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Strategy

Nigeria had already adopted an approach of cautious andprudent borrowing following the lessons from the debt

overhang. Debt Strategy is to use debt as a means of supporting

growth and development.

External debt strategy is: to borrow mainly on

concessional basis. The commercial window will only beassessed for clearly defined purposes.

Domestic debt strategy is: to reduce governmentsborrowing costs while minimising risks. This strategyhas several components.

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Management Legal Provisions(DMO Act, 2003 and Fiscal

Responsibility Act, 2007)

Institutional Arrangements(DMO, established in 2000) National Debt Management Framework

Annual Debt Sustainability Workshop, conducted since2006, in line with IMF/World Bank recommendations

Excess Crude Oil Account, created from the adoption ofan oil price-based fiscal rule in 2004.

Debt management capabilities (including legal andinstitutional frameworks) are being migrated to the sub-

national level.

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General Policy Response toEconomic Crisis Setting up of an Economic Management Team

by the President

Expansionary Monetary Policy since Sept 2008

Stimulus Packages in the pipeline. The one forthe agricultural sector is at an advanced stage.

Reforms expected in the domestic capitalmarket.

Closer monitoring of banks by the Central Bankto ensure the health of the sector.

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Conclusions

The outlook for the global economy is not bright in theshort run, but Nigeria is one of the countries that is

expected to grow, albeit at a reduced rate(6.24 in 2008and above 3% in 2009). The projected growth based onthe 2009 Budget is 8.9%.

Outlook for the oil sector depends on economic recovery

in the G20 countries. Nigerias debt will continue to be sustainable through

deliberate government policies and actions.

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Nigeria DebtVulnerabilityinlightoftheeconomicandfinancialcrisis

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