Monday 20 February 2017

‘Eurobond is our strategy to fund capital projects’


Minister of Finance, Mrs. Kemi Adeosun, in this interview with selected journalists speaks on the prospects of the $1billion Eurobond by the federal government and more. Excerpts:
Outcome of the Eurobond programme
The Eurobond is part of our funding strategy for our 2016 capital expenditure and will be spent on key infrastructure projects, in line with our economic plan.
Over the last two weeks I have been privileged to lead a strong delegation including the Minister for Budget and National Planning, the Central Bank Governor, the DG of the Debt Management Office, the DG of the Budget Office and representatives of the National Assembly to engage international investors and we’ve been very pleased with the response. The investment community understands the strategy we are adopting and have been positive. That is reflected in the bond being almost eight times oversubscribed.
Terms of the Eurobond
We have borrowed US$1 billion over a 15-year period, with an annual coupon of 7.875%. That compares to an average Naira borrowing rate of 15%. The international capital markets are a key source of capital for us and our sovereign issuance provides a key benchmark for corporate borrowers looking to tap the ICM. Ultimately, we want to achieve an optimal mix of borrowing from the ICM and other external sources, including concessional funding from the World Bank and China, as part of the 2017 budget process.
What Eurobond means to the man on the streets
We know that the state of the economy is creating challenges for people across the country. Inflation is high and so prices are rising. That’s why we have been working to ensure our social intervention programmes are prioritised, and we have already started the conditional payments programme. But we also know that the reason we are in this situation is because we have not taken the hard decisions to re-structure our economy and we must do so now, if we are going to offer the prospect of long term improvements in quality of life for all Nigerians.
How government raise further foreign debt
The simple reality is that international debt is considerably cheaper than domestic debt and while we extensively utilise domestic debt instruments, we need longer term and cheaper debt to allocate to infrastructure spending. That is available from international sources, and we are seeking to maximise the tenure and minimise the cost of this debt so we get the best deal for Nigeria.
Justification for Eurobond
The Eurobond programme was approved as part of the 2016 budget, but that process began late, with final budget approval only delivered in May 2016. We’ve extended the 2016 budget spending cycle through to the end of March 2017. The Eurobond, and the AfDB loan we secured late last year, are allocated to capital projects identified in that budget.
Great expectations
The government’s debt strategy has been well defined and approved by the National Assembly. We are focused on re-balancing our debt profile to ensure we have longer term debt that can be used to fund infrastructure development. You can expect to see us continue to raise international funds over the coming two years as we work towards an optimal debt profile.
Can we afford that level of debt?
Yes. We have one of the lowest debts to GDP ratios amongst emerging economies. We have the headroom to borrow, but we must not be complacent. We must ensure that we are rapidly increasing government revenue at the same time to give us enhanced resources to deliver growth.
he economic recession notwithstanding, the country was able to raise over $7.8billion of the proposed $1 billion in the Eurobond market, in what signifies a global investors’ endorsement of the federal government’s economic recovery initiatives and growth.
The issue was 750 percent oversubscribed; underscoring buoyant investor appetite for Africa’s largest emerging market.
The bond, issued under Nigeria’s newly established Global Medium Term Note programme, is the third in the series after the ones in 2011 and 2013.
The note which has February 16, 2032 as maturity date for repayment on the principal is expected to yield interest at a rate of 7.88 percent.
The roadshow to London and other major economic cities in the U.S was led by the Minister of Finance, Kemi Adeosun accompanied by her counterpart in the Ministry of Budget and National Planning, Udo Udoma; Central Bank of Nigeria governor, Godwin Emefiele and Director-General of the Debt Management Office (DMO), Abraham Nwankwo, as well as the Director General of the Budget Office, Ben Akabueze.
“Nigeria is implementing an ambitious economic reform agenda designed to deliver long-term sustainable growth and reduce reliance on oil and gas revenues while reducing waste and improving the efficiency of government expenditure,” Mrs. Adeosun said of the bond.
Also commenting on the notes’ pricing, the DMO Director-General, Abraham Nwankwo, said: “Nigeria is delighted to have successfully priced its third Eurobond issue. We have successfully extended the tenor of our borrowing programme in the international capital markets to 15 years, at a price that reflects belief in the quality of Nigeria’s cash flows and government.”
He said the Eurobond is the latest step in a broader debt strategy designed to significantly re-balance our debt profile towards longer term financing and reduce the burden of interest on our annual budget.
Initial fears over the $1b Eurobond
It would be recalled that major market players had queried that the Eurobond issuance will meet brick wall due mainly to the country’s Foreign Exchange policy which has seen the Central Bank of Nigeria controlling the exchange regime.
Thus, many stakeholders and international financial market analysts had argued that the Eurobond Roadshow in London, Los Angeles and New York due to government’s control of the Forex regime will adversely impact on the fortunes of the Eurobond. This is the first time Nigeria is issuing a $1b Eurobond in a single tranche. In 2013 the federal government issued a $1b Eurobond but in two tranches of $500million each for five and ten years’ maturity each. 2011 was the debut outing of $500million with maturity period of ten years.
But the government said the offering attracted significant interest from leading global institutional investors.
What this means for Nigerians
The euphoria generated by the Eurobond notwithstanding, the average man on the streets hardly knows what this whole thing translates to in terms of impact.
Speaking on what lies in store for Nigerians, a cross-section of respondents expressed serious misgivings over the development as they presented nuanced view of what they think the bond issue portends.
To many of these respondents, the assurances of a better future promised by government hardly inspires because nothing on ground seems to point to that future.
“We/re been taken for a ride by this government. It is really painful to hear that all the government has done is to mortgage away our future with this Eurobond,” lamented Alabi Moyosore, a public affairs analyst.
In the view of a financial analyst, Kunle Orebe he is optimistic that the federal government will do what it says it will do. “I believe in this government because Rome was not built in a day. The government is trying to raise money. I may not be able to talk about the past government. But this government believes they must not misuse tax payers’ money anyhow. This is a democracy and as such, people in power should expect criticism because of opposition. I believe criticism is not limited to bad ideas, good things too need criticism, and we should applaud them. I believe they will use the bond rightly. They will get it right. At least with the way they’re fighting corruption and they get it right in economy-wise, things will get better.”
Odunaye Babatunde, a charted accountant however has a different view. According to him, it is tough to believe in this government because of the rather slow pace of progress being made in the key sectors of the economy.
“My own is that until we see them doing things like power, works, etc, that’s when we can say they’ve gotten it right. But for me I don’t understand this government and what they have to offer. But let us see what they have to offer Nigerians first then we can give make our assessment.”
For Adeleke Sunday, who himself is a chartered accountant, holds the view and very strongly too that the federal government’s intention is suspect still because it leaves little to cheer about.
“It can never be a yes or no answer because this government has told us it is going to use debts to finance the budget, whereas opportunities abound in this country. One thing about Nigeria is that we don’t believe in ourselves because of the past governments. Let’s just give them benefit of doubt. Those investors believe that the government can’t die that is why they invest in the bond. Another major problem in this government is the economic team. I have doubt in the team. I think we should have a good economic team that will make this government and the economy well.”
Echoing similar sentiments, Olu Adeleke, an economist, in his view, said the team as currently assembled lacks what it takes to lift the economy out of recession. “The current economic challenges facing the nation pre-dates President Muhammadu Buhari’s administration. But in Buhari, Nigerians see a changed agent. They trust his pedigree and reputation, which was why he was massively voted for. However, the biting economic woes leading to shutting down of firms, job losses, high cost of living have heightened fresh calls to rejig his economic team.”
Gains and prospects of Eurobond
Many equally believe that the Eurobond signifies hope in the horizon. Firing the first salvo, Mr. Olusola Oni, a stockbroker and Chief Executive Officer of Sofunix Investment Limited told The Nation the best to understand the gains of the investment to the average Nigerian is to first have a grasp of what the bond is all about.
According to him, “What this means to an average Nigeria is that there is faith in our economy. When you are buying into a financial asset like the Eurobond, it means you are buying into the future of that asset. By implication, those who subscribed to that Eurobond believe and have confidence and prospect in the economy. That is what they are buying to generate bountifully harvest or profit for them at the end of the day. If it is not subscribed, it will have been the reverse. If that had been the case, that means they lack confidence in our economy they don’t want to take the risk.”
The Eurobond, Oni emphasised: “Is backed up by our federal government it means there is faith in what the federal government is doing. Even with the current situation of our economy those who invest still believe and that confidence in our economy that means the economy has direction that means they can identify with what we are doing and also invest in our economy.”
Like Oni, Johnson Chukwu, who sits atop as the Managing Director of  Cowry Asset Management Limited, said the success of the Eurobond offer indicates that international investors still have some level of confidence in the Nigerian economy and would be willing to invest in Nigerian instruments that meet their risk acceptance criteria and offer them commensurate return.
“In effect, despite the challenges of our economic situation, should our economic managers evolve appropriate policies, foreign investors would be willing to return to the country,” he said.
Expatiating, he said: “If foreign investors resume their demand for Nigerian assets including local currency assets, the associated dollar inflows will help boost our foreign reserves, stabilise the exchange rate and possibly lead to appreciation of the Naira. This will turn lead to reduction in prices of goods and services. An increase in foreign reserves will also make it easier for Nigerian companies to access foreign exchange for importation of raw materials and equipment which will then improve their manufacturing activities with consequent increase in employment for Nigerians.”
At the macroeconomic level, Nigerian foreign reserves, the Cowry Asset boss said, have been boosted by the proceeds of the Eurobond offer. “Beyond that, the success of the offer will also help the government meet its budgetary plan. The government has indicated in its 2017 budget that it will build part of the Lagos to Kano standard gauge rail line with the bond proceeds. The government now has the financial resource to embark on this all important infrastructure development.”

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