FG’s debt stock rose 5.03% QoQ to N18 trillion over Q1 2018 with domestic debt accounting for 70% of total debt. The increase in debt stock over Q1 was largely on the back of a $2.5 billion Eurobond issued in February, which resulted in a 19% QoQ expansion in external debt to $5.4 billion.
Elsewhere, domestic debt stayed flat (-0.1% QoQ) at N12.6 trillion on the back of lower Treasury bill stock (-7.5% QoQ to N3.3 trillion) which neutered the moderate increase in bonds (+2.9% QoQ to N8.9 trillion). Specifically, the FG has net repaid a total of N49.7 billion YTD on both T-bills and Bonds reflecting its decision to cut back on domestic debt in favour of offshore funding.
Reflecting the current debt stock and elevated borrowing rates over 2017, debt servicing printed at N712 billion (+173% QoQ and +39% YoY), with domestic debt service rising to N644 billion (+179% QoQ) while external debt service rose $97 million to $225 million.
Over 2018, with the support of higher oil receipts, our expectation of a lower fiscal deficit of N1.88 trillion (vs. N2.36 trillion budgeted in FY 17) guides to lower borrowings YoY with much focus on the external leg. On the domestic leg, we see scope for a slight pick up in borrowings, albeit moderate, given FG’s strong imperative to implement the 2018 budget ahead of 2019 elections as well as the fact that FGs borrowing was largely muted in H1 18.
On the foreign leg, going with FG’s planned fiscal deficit financing plan, we have factored $2.8 billion foreign borrowings over H2 2018, which in addition to the earlier raised $2.5 billion translates to total foreign borrowings of $4.5 billion over 2018 (2017: $4.8 billion). Thus, FG’s aggregate debt stock should expand 6% YoY to N20 trillion in 2018. Overall, given our expected total borrowings, we estimate the split between domestic and foreign debt to shift slightly to 69:31 in 2018 from 70:30 in 2017.
On debt servicing, with the US 10-year benchmark yield currently at 2.87% (vs. 2.46% in January 2018), we expect higher rates on the proposed $2.8 billion Eurobond issuance. Going by recent Eurobond issuances across emerging markets, we estimate an increase of between 50bps – 150bps on Nigeria’s Eurobond issuance. On balance, we expect foreign debt service to expand YoY.
Elsewhere, we expect tamer domestic debt service cost reflecting lower domestic borrowings and currently low-interest rates. That said, we believe external borrowings still looks cheaper in the short term. Particularly, we estimate average foreign borrowing cost to be between 8.5% – 9.0% in 2018 (vs. average domestic borrowing costs of 13.4%).