It will appear the Federal Government of Nigeria (FGN) is insolvent. Insolvency means “unable to pay obligations”.
Let us review the six month report published by the FGN Budget Office. For the six months ended June 2017, the total retained revenue of the FGN is put at N1,004b, the total debt service amount for the same period is N927b. This means the FGN has ONLY N77b to pay salaries and build hospitals, roads etc. However the FGN paid N282b in total recurrent in the same period.
In summary, the Federal Government of Nigeria cannot pay her bills from her earnings alone. To pay salaries and fund the judiciary, INEC etc, the FGN has to borrow, and Nigeria is borrowing a lot. According to the Debt Management Office (DMO), Nigeria’s total domestic debt as at June 2017, is put at $39b, while new domestic borrowing has been pegged at $5.52b, while new external borrowing is put at 16.56 billion for 2017.
So to be clear, the FGN has to borrow, they have no choice. When the government seeks to borrow, it looks to the DMO to issue bonds on her behalf. Bonds are essentially IOUs i.e I Owe You. Essentially the DMO sell bonds to investors in exchange for cash. Investors assume the FGN has more capacity to repay debt than other borrowers, thus the rate the FGN borrows is known as the risk free rate. Other borrowers are able to access funds from the financial markets at a rate based off the FGN risk free rate.
However even with a better risk rating, the FGN is in competition to get investor funds, it has to offer a rate that will make investors place funds in FGN saving bonds and bills.
Looking at the Central Bank of Nigeria data, we see that the average commercial bank saving rate in Nigeria is 4.22% p.a, however the FGN is offering 12 month TBills at a marginal rate 15.59%. You do not need to be a genius to see that the FGN is crowding out other borrowers. In simple terms, if you are an investor, your money should be in FGN securities because they are “safer” and pay more.
That done, what type of FGN securities should you the investor invest in?
The FGN borrows by issuing various bonds of different duration, the way it works is the longer the duration the FGN seeks to borrow funds from you, the higher the FGN is willing to pay as a coupon. The 2 year FGN Savings Bonds for instance offer a 12.05% coupon while similar 3 year bonds offer 13.05%, the 5 year bonds have a maximum duration of 364 days and have a marginal rate of 15.59
So lets bring this all together,
1, The FGN will borrow, it cannot pay its bills without borrowing
2. The FGN borrowing is termed “risk free” but offers the highest return
3. The highest coupons are offered with the longer duration.
To be clear, we believe the FGN borrowing at higher rates “crowds out” the private sector from the debt markets and raises cost of doing business in the economy, killing Small & Medium Scale Enterprises. However as an investors, take advantage. Going forward, the FGN is looking to borrow more from international markets, these great FGN Saving Bonds yields may not be around for long.