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Reviewing Nigeria’s debt strategy
The Director-General of Nigeria’s Debt Management Office, Patience Oniha says Nigeria plans to talk to concessionary lenders for about $2.8 billion external borrowings for the 2020 budget. Nnamdi Nwizu, Co-Managing Partner at Comercio Partners joins CNBC Africa for more on some of the plans raised.
Mon, 20 Jan 2020 15:15:40 GMT
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AI Generated Summary
- Central Bank's policy changes influence bond market yields and investor options
- Investor concerns rise due to increasing debt service obligations and revenue challenges
- Balancing debt sustainability and revenue enhancement crucial for mitigating credit risks
Nigeria's debt strategy has been a topic of concern for investors as the Director-General of Nigeria's Debt Management Office, Patience Oniha, announced plans to seek about $2.8 billion external borrowings for the 2020 budget. Nnamdi Nwizu, Co-Managing Partner at Comercio Partners, shared his insights on the evolving debt markets and the impact on investors. With the Central Bank maintaining low rates in the fixed income markets and bond yields gradually decreasing, the fiscal situation of the government remains a key factor in determining the trends in the bond market this year.
Nwizu highlighted the importance of policy changes by the Central Bank in influencing yields, especially in the longer end of the market where rates continue to trade above inflation. The move to phase out OMO bills and encourage trading in bonds signals a shift in investment options for fixed income investors in Nigeria. The restriction of locals from the OMO market aims to attract foreign investors and maintain lower rates, showcasing the Central Bank's innovative approach to liquidity management.
Investors in fixed income instruments are closely monitoring the government's balance sheet, particularly the debt service to GDP ratio and debt service to revenue ratio. The concern lies in the significant increase in debt issuance compared to revenue growth, posing challenges for debt sustainability. The government's ability to enhance revenue generation and utilize debt for revenue-generating purposes becomes essential in addressing investor apprehensions.
As debt service obligations continue to rise, investors face the dilemma of pricing in the associated risks, which could prompt an increase in yields to compensate for potential credit risks. The balance between raising yields to mitigate risks and avoiding a scenario where debt service outpaces revenue growth remains a delicate challenge for investors and policymakers alike.
The potential implications of a higher debt service to revenue ratio raise questions about the government's capacity to meet its repayment obligations and the risk of resorting to unsustainable measures such as excessive money printing. Investors are wary of default risks and emphasize the importance of prudent debt management and revenue enhancement strategies to safeguard against financial instability.
In conclusion, Nigeria's debt strategy underscores the critical need for sound fiscal policies and effective utilization of borrowed funds to drive sustainable economic growth. Investors remain vigilant about the government's debt sustainability and revenue generation initiatives as they assess the credit risk associated with investing in Nigerian government bonds.
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