DEBT MANAGEMENT OFFICE NIGERIA
Impact of the financial and economic crisis on debt vulnerability: Nigerias case
Presentation at the Commonwealth Ministerial Debt Sustainability Forum April 22, 2009 By Patience Oniha Director, Market Development Department Debt Management Office, Nigeria
Genesis
Financial Crisis : Toxic assets resulting in losses and weak balance sheets Economic Crisis : Fallout of the financial crisis
Nigerias Debt Profile
Significant reduction in total debts, post Paris and London Clubs exits in 2005 and 2006 respectively. Total Debts at 31 Dec 2008 was USD 21.3bn, a 117% drop from 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 31 Dec 2008, USD2.86bn or 77% was concessional
Sustainability
Sharp reduction in total debts and increased earnings from oil as well as steady GDP growth have collectively, made Nigerias total public debt sustainable Debt Sustainability Ratios for 2008 are provided in the following Tables:
Debt Statistics
2008 Actual % Total Debt/GDP Ext Debt/GDP Dom Debt/GDP 12 2 10 Threshold % 45 20 25
Debt Statistics
Solvency/Liquidity Indicators NPV of Debt/GDP NPV of Debt/Revenue Debt Service/Revenue 2008 Actual % 9.5 33.1 11.1 Threshold % 30 200 25
Vulnerability
Nigeria is not immune from the global financial and economic crises. Nigerias vulnerability is largely due to its dependence on the production and exports of crude oil. Economic growth/boom in the advanced countries have a strong positive impact on the price of crude oil. External Reserves already dropped from a peak of USD62bn 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 losses due 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.
Vulnerability
Can also be viewed from the private sectors ability to access credit in the international capital markets. Nigerias private sector was just beginning to receive uncollaterised credits following the improved debt profile and sovereign rating. These were in the form of clean trade lines and short term loans from the global banks and through Eurobonds( Guaranty Trust BankUSD350m and First Bank of Nig- USD175m). While the domestic institutions have grown bigger and stronger, the financial meltdown has constrained their ability to access more capital.
Strategy
Nigeria had already adopted an approach of cautious and prudent 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 be assessed for clearly defined purposes. Domestic debt strategy is: to reduce governments borrowing costs while minimising risks. This strategy has 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 since 2006, in line with IMF/World Bank recommendations Excess Crude Oil Account, created from the adoption of an oil price-based fiscal rule in 2004. Debt management capabilities (including legal and institutional frameworks) are being migrated to the subnational level.
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General Policy Response to Economic Crisis
Setting up of an Economic Management Team by the President Expansionary Monetary Policy since Sept 2008 Stimulus Packages in the pipeline. The one for the agricultural sector is at an advanced stage. Reforms expected in the domestic capital market. Closer monitoring of banks by the Central Bank to ensure the health of the sector.
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Conclusions
The outlook for the global economy is not bright in the
short run, but Nigeria is one of the countries that is expected to grow, albeit at a reduced rate(6.24 in 2008 and above 3% in 2009). The projected growth based on the 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.
