FINANCING THE 2017 BUDGET DEFICIT

Goddy Egene writes that given the challenging environment, it is better for the Debt Management Office to begin strategising on how to successfully finance the deficit in the 2017 budget.
All eyes will soon focus on the National Assembly when it resumes and begin to consider the 2017 budget presented by President Muhammadu Buhari last month. President Buhari had presented a budget of N7.298 trillion to the National Assembly up from N6.077 trillion in 2016. A breakdown of the budget showed that N2.24 trillion will be for capital expenditure, while N2.98 trillion will be for recurrent non-debt expenditure.

Aggregate revenue is put at N4.94 trillion, comprising N1.985 trillion from the oil sector and N1.73 trillion from the non-oil sector. Budget deficit is put at N2.63 trillion, which is about 2.18 per cent of the country’s gross domestic product (GDP). The deficit would be funded through N2.23 trillion estimated borrowing. Out of this amount, N1.067 trillion would come from external borrowings while N1.245 trillion would come from local borrowing.

The amount to borrow this year is higher than the N1.8 trillion meant to finance the deficit of 2016 budget. Although it has not be confirmed if the federal government was able to successful borrow those funds, the stakes are higher now in 2017.

This is why many analysts and stakeholders believe the Debt Management Office(DMO), which has the obligation to borrow on behalf of the government has a herculean task ahead. According to them, given the challenging operating environment, which borrowing difficult, DMO should begin putting on its thinking cap and strategise on how to successfully raise funds needed to finance the deficit.

Need to borrow
According to a former Managing Director of Unity Bank Plc, Rislanudeen Muhammad, in a period of recession where the economy has contracted for three quarters consecutively and still counting, the plausible way to pull ourselves out of it is by way of reflating the economy through massive investment in infrastructure, income and job creating sectors like agriculture, mining and manufacturing, public private partnership etc with multiplier implication of increasing employment and jump starting the micro economy.

“To that extent, the budget was rightly structured to deal with that challenge of stagflation and recession. However we need to be careful in ensuring we borrow for capital expenditure only, on projects that will generate growth and support repayment of the loan. We should not borrow for consumption,” he said.

He noted that due to lack of any fiscal buffer in savings, Nigerian government today do not have any option of financing its budget other than through borrowing.

First quarter borrowing plan
In an apparent move to ensure that funds needed from the domestic are sourced, the DMO said it planned to issue between N340 billion to N430 billion of local-currency bonds during the first quarter of this year.

It explained that it would auction N110 billion to N140 billion worth of bonds maturing in 2021 and N85 billion to N105 billion in debt maturing in 2026. It will also sell N45 billion to N55 billion in bonds maturing in 2027 and N100 billion to N130 billion of the 2036 debt.
According to the debt issuance calendar, the 2027 bond will be a new issue, in March. The rest will re-open previously issued debt, starting after January 18, Reuters reported.

Planned $1bn Eurobond
Another source of funding for the government is the planned $1 billion Eurobond. Although this plan has been on since last year, it was not executed last year. However, all indications point to the fact that $1 billion would be raised this year. Already the government has appointed Citigroup, Standard Chartered Bank and Stanbic IBTC Bank as advisers on the bond.

Speaking on the bond, the e Minister of Finance, Mrs. Kemi Adeosun, has the selection of the advisors followed her presentation of a memorandum to Federal Executive Council meeting seeking approval for the issuance of the Eurobond in the International Capital Market and the appointment of transaction parties responsible for the execution of the programme.

According to her, the $1bn Eurobond issuance would provide funds to support the implementation of capital projects in the 2016 budget.

Apart from Citigroup, Standard Chartered Bank and Stanbic IBTC Holdings Plc, she gave names of other appointed transaction parties for the execution of the bond as White & Case LLP, Banwo & Ighodalo and AfricaPractice.

She stated that the selection was based on an open and competitive bid process in line with the Public Procurement Act, 2007 and that a certificate of ‘No objection’ was received from the Bureau of Public Procurement to award contracts to the recommended parties.
The minister is optimistic about the success of the issue.

She said: “We have so far received strong commitment from the international community. Investors believe in the long-term economic outlook for Nigeria as we continue with our structural reforms and increased focus on infrastructure development to diversify the economy and grow the non-oil sector. Stable oil prices and steadying foreign reserves will support our plans and we expect high demand for this issue to further push down yields. We are confident that this will be a successful outing in 2017.”

The Sukuk option
Apart from the Eurobond, analysts believe that another way DMO may successfully raise funds to finance the deficit is to tap into the non-interest financial market. Already plans are on to float the first sovereign Sukuk this year. Analysts believe that apart from sourcing for capital from conventional sources, issuing a sovereign Sukuk is a very viable alternative source.

By the end of 2015, total assets under management in the global Islamic finance industry surpassed $2.5 trillion as more and more investors continue allocating their funds to Shariah compliant instruments across the globe. There is therefore a huge, unmet demand for Sukuk issuances from high-potential economies like Nigeria, especially in view of the fact that similar issues by peer countries were oversubscribed. The federal government can therefore leverage this market to raise money to fund critical infrastructure across the country.
The Securities and Exchange Commission (SEC) and the DMO have been working closely to ensure the floatation of the sovereign Sukuk is realised this year.

Also the Central Bank of Nigeria (CBN) last year released the guidelines for granting asset status to Sukuk instruments issued by government. The Director General of SEC , Mounir Gwarzo commended the release of the guidelines saying it followed follow diligent advocacy efforts from the Capital Market Committee (CMC) on the need to grant liquidity status to Sukuk in order to bolster its appeal as a product for both issuers and investors alike.

“Sukuk is becoming increasingly attractive as a capital market instrument across the globe. Annual Sukuk issuances around the world have grown from $15 billion in 2008 to over $150 billion in 2015. As the federal and state governments seek alternative funding sources for infrastructure, these new guidelines will make Sukuk more available option,” the SEC boss said.
According to him, “The guidelines will play a key role in broadening and deepening Nigeria’s financial system by catalysing the development of non-interest products and enhancing financial inclusion. We wish to commend the CBN for this laudable step while appreciating the CMC sub-Committee on non-interest products for their dedicated work leading to the release of these guidelines,” the capital market regulator added.

DMO’s capacity
Although successfully raising the N2.3 trillion looks a major task, some analysts said given the pedigree and capacity of DMO, it is achievable. Established in 2000, the DMO has recorded significant achievements. Prior to the establishment of DMO, the management of the nation’s debt was characterized by systematic and structural deficiencies.

In practice, debt management functions were split across several government departments including the Federal Ministry of Finance, the Office of the Accountant General of the Federation and the Central Bank of Nigeria. This approach was laden with operational inefficiencies and poor coordination, inadequate debt data recording system and poor information flow across agencies. The result was inaccurate and incomplete loan records which gave rise to difficulties in the verification of creditors’ claims arising from conflicting figures from various bodies handling the debt management function.

However, the establishment of the DMO brought sanity into the system as it centralized the nation’s debt management functions with the statutory mandate of maintaining comprehensive, accurate and timely records of the nation’s debts, prudent management of the debt portfolio and negotiating with and ensuring debt relief from creditors.

Besides, the emergence of Dr. Abraham Nwankwo at the helm of DMO in 2007 gave more fillip to the operations of the agency with positive impact on the economy.

Given his solid academic background and position as one of the pioneer management staff of DMO, Nwankwo led the charge in the on-going transformation of the capital market and played a pivotal role in the repositioning, strengthening and resuscitation of the FGN Bond market.

The DMO has formulated a National Debt Management Framework (NDMF), 2008-2012, a review of same and publication of the revised (2nd) NDMF, 2013-2017 which incorporated debt management policies and guidelines. The agency has ensured regular and timely servicing of government’s debt has continued to conduct an annual Debt Sustainability Analysis (DSA) and has successfully prepared a Medium Term Debt Management Strategy (MTDS), 2012-2015 which is being implemented.

One of the major objectives of MTDS is to achieve optimal composition of external and domestic debt structure and to ensure low cost of government debt consistent with a prudent level of risk.

DMO has consistently promoted policies to encourage the creation of opportunities for private sector access to long term capital in both domestic and international capital markets in order to sustain and expand their businesses.

Determined to facilitate access to the International Capital Market for Nigerian corporate players, DMO issued $500 million Sovereign Eurobond in 2011. This was followed with $1 billion dual-tranche Eurobonds in July 2013, thus creating benchmarks for corporate borrowers. In 2014, DMO issued FGN Bonds in Global Depository Note (GDN) format for the first time aimed at diversifying the investor base and attract foreign investors to the domestic securities Market.

Also, DMO developed a template for the establishment of Debt Management Departments (DMDs) which include outline of the legal institutional human resource framework. All the 36 states including the federal capital territory (FCT) have established DMDs) in conjunction with the agency.

In 2015, DMO assisted in the managing and restructuring of the debt of cash strapped states in the country as a result of their failure to meet their financial obligations. Following the announcement of a bailout package for the states by President MuhammaduBuhari, 22 states applied to DMO for their debts to be re-structured into Federal Government of Nigeria Bonds.

The agency successfully concluded the restructuring of N322.788 billion short term commercial bank debts of 11 states out of the 22 states to long term domestic bond at 14.83 percent yield in 20 years.